UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20202021
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to_______ .
| 001-32146 | ||
| Commission file number |
| (Exact name of registrant as specified in its charter) |
| New York | 16-1229730 | |
(State or other Jurisdiction of incorporation- or Organization) | (IRS Employer Identification No.) |
| (Address of principal executive offices) |
| (585)325-3610 | ||
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.02 par value per share | DSS | The NYSE American LLC |
As of October 13, 2020,20, 2021, there were 5,173,712 shares of the registrant’s common stock, $0.02 par value, outstanding.
DOCUMENT SECURITY SYSTEMS, INC.
DSS, INC.
FORM 10-Q
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
DOCUMENT SECURITY SYSTEMS,DSS, INC. AND SUBSIDIARIES
(unaudited)
As of
| September 30, 2020 | December 31, 2019 | |||||||
| unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 11,645,000 | $ | 1,096,000 | ||||
| Accounts receivable, net | 2,589,000 | 4,212,000 | ||||||
| Inventory | 2,396,000 | 1,366,000 | ||||||
| Assets held for sale - discontinued operations | - | 342,000 | ||||||
| Prepaid expenses and other current assets | 1,136,000 | 460,000 | ||||||
| Total current assets | 17,766,000 | 7,476,000 | ||||||
| Property, plant and equipment, net | 4,141,000 | 4,328,000 | ||||||
| Investments | 11,386,000 | 2,154,000 | ||||||
| Marketable securities | 5,814,000 | - | ||||||
| Notes receivable | 529,000 | 793,000 | ||||||
| Non-current assets held for sale - discontinued operations | 886,000 | 1,812,000 | ||||||
| Other assets | 210,000 | 50,000 | ||||||
| Right-of-use assets | 17,000 | 144,000 | ||||||
| Goodwill | 1,769,000 | 2,454,000 | ||||||
| Other intangible assets, net | 39,475,000 | 935,000 | ||||||
| Total assets | $ | 81,993,000 | $ | 20,146,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,402,000 | $ | 1,492,000 | ||||
| Accrued expenses and deferred revenue | 1,272,000 | 936,000 | ||||||
| Other current liabilities | 1,248,000 | 390,000 | ||||||
| Current Liabilities held for sale - discontinued operations | 274,000 | 274,000 | ||||||
| Revolving line of credit | - | 500,000 | ||||||
| Current portion of lease liability | 13,000 | 123,000 | ||||||
| Current portion of long-term debt, net | 261,000 | 441,000 | ||||||
| Total current liabilities | 4,470,000 | 4,156,000 | ||||||
| Long-term debt, net | 3,041,000 | 2,310,000 | ||||||
| Long term lease liability | 4,000 | 19,000 | ||||||
| Non-current liabilities held for sale - discontinued operations | 612,000 | 807,000 | ||||||
| Other long-term liabilities | 507,000 | 507,000 | ||||||
| Deferred tax liability, net | 44,000 | 44,000 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $.02 par value; 200,000,000 shares authorized, 47,000 shares issued and outstanding (0 on December 31, 2019); Liquidation value $1,000 per share, $47,000,000 aggregate. | 1,000 | - | ||||||
| Common stock, $.02 par value; 200,000,000 shares authorized, 5,174,000 shares issued and outstanding (1,206,000 on December 31, 2019) | 103,000 | 24,000 | ||||||
| Additional paid-in capital | 174,423,000 | 115,560,000 | ||||||
| Non-controlling interest in subsidiary | (307,000 | ) | - | |||||
| Accumulated deficit | (100,905,000 | ) | (103,281,000 | ) | ||||
| Total stockholders’ equity | 73,315,000 | 12,303,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 81,993,000 | $ | 20,146,000 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 69,137,000 | $ | 5,183,000 | ||||
| Restricted cash | 350,000 | - | ||||||
| Accounts receivable, net | 2,774,000 | 3,589,000 | ||||||
| Inventory | 3,535,000 | 1,955,000 | ||||||
| Assets held for sale - discontinued operations | - | 531,000 | ||||||
| Current portion of notes receivable | 19,716,000 | - | ||||||
| Prepaid expenses and other current assets | 1,469,000 | 1,192,000 | ||||||
| Total current assets | 96,981,000 | 12,450,000 | ||||||
| Property, plant and equipment, net | 6,396,000 | 4,100,000 | ||||||
| Investment in real estate, net | 6,495,000 | - | ||||||
| Other investments | 11,337,000 | 1,788,000 | ||||||
| Investment, equity method | 16,107,000 | 12,234,000 | ||||||
| Marketable securities | 9,207,000 | 9,136,000 | ||||||
| Notes receivable | 4,483,000 | 537,000 | ||||||
| Non-current assets held for sale - discontinued operations | - | 790,000 | ||||||
| Other assets | 409,000 | 384,000 | ||||||
| Right-of-use assets | 198,000 | 182,000 | ||||||
Deferred tax asset, net | 283,000 | - | ||||||
| Goodwill | 43,807,000 | 26,862,000 | ||||||
| Other intangible assets, net | 23,373,000 | 23,456,000 | ||||||
| Total assets | $ | 219,076,000 | $ | 91,919,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,948,000 | $ | 1,457,000 | ||||
| Accrued expenses and deferred revenue | 9,555,000 | 5,260,000 | ||||||
| Other current liabilities | 415,000 | 1,435,000 | ||||||
| Current liabilities held for sale - discontinued operations | - | 275,000 | ||||||
| Current portion of lease liability | 122,000 | 167,000 | ||||||
| Current portion of long-term debt, net | 498,000 | 278,000 | ||||||
| Total current liabilities | 12,538,000 | 8,872,000 | ||||||
| Long-term debt, net | 6,664,000 | 1,976,000 | ||||||
| Long term lease liability | 75,000 | 15,000 | ||||||
| Non-current liabilities held for sale - discontinued operations | - | 505,000 | ||||||
| Other long-term liabilities | 507,000 | 507,000 | ||||||
| Deferred tax liability, net | - | 3,499,000 | ||||||
| Commitments and contingencies (Note 9) | - | |||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $.02 par value; shares authorized, shares issued and outstanding ( on December 31, 2020); Liquidation value $1,000 per share, $- aggregate. $43,000,000 on December 31, 2020). | - | 1,000 | ||||||
| Common stock, $ par value; shares authorized, shares issued and outstanding ( on December 31, 2020) | 1,594,000 | 116,000 | ||||||
| Additional paid-in capital | 294,682,000 | 174,380,000 | ||||||
| Non-controlling interest in subsidiary | 23,395,000 | 3,430,000 | ||||||
| Accumulated deficit | (120,379,000 | ) | (101,382,000 | ) | ||||
| Total stockholders’ equity | 199,292,000 | 76,545,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 219,076,000 | $ | 91,919,000 | ||||
See accompanying notes to the condensed consolidated financial statements.
| 3 |
DOCUMENT SECURITY SYSTEMS,DSS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (loss)
(unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Printed products | $ | 3,416,000 | $ | 2,971,000 | $ | 10,652,000 | $ | 8,409,000 | ||||||||
| Rental income | 184,000 | - | 184,000 | - | ||||||||||||
| Direct marketing | 966,000 | 715,000 | 2,382,000 | 1,793,000 | ||||||||||||
| Total revenue | 4,566,000 | 3,686,000 | 13,218,000 | 10,202,000 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | 3,184,000 | 2,566,000 | 9,513,000 | 6,869,000 | ||||||||||||
| Selling, general and administrative (including stock-based compensation) | 6,188,000 | 3,449,000 | 17,621,000 | 7,327,000 | ||||||||||||
| Depreciation and amortization | 739,000 | 244,000 | 2,075,000 | 812,000 | ||||||||||||
| Total costs and expenses | 10,111,000 | 6,259,000 | 29,209,000 | 15,008,000 | ||||||||||||
| Operating loss | (5,545,000 | ) | (2,573,000 | ) | (15,991,000 | ) | (4,806,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 1,593,000 | 10,000 | 3,130,000 | 61,000 | ||||||||||||
| Other income | 325,000 | - | 575,000 | - | ||||||||||||
| Interest expense | (31,000 | ) | (29,000 | ) | (157,000 | ) | (102,000 | ) | ||||||||
| Gain on extinguishment of debt | - | - | 116,000 | - | ||||||||||||
| (Loss) gain on investments | (2,996,000 | ) | 7,782,000 | (10,894,000 | ) | 8,366,000 | ||||||||||
| Loss on equity method investment | (1,645,000 | ) | - | (2,556,000 | ) | - | ||||||||||
| Amortization of deferred financing costs and debt discount | - | (8,000 | ) | - | (8,000 | ) | ||||||||||
| (Loss) income from continuing operations before income taxes | (8,299,000 | ) | 5,182,000 | (25,777,000 | ) | 3,511,000 | ||||||||||
| Income tax benefit | 1,624,000 | - | 4,315,000 | - | ||||||||||||
| (Loss) income from continuing operations | (6,675,000 | ) | 5,182,000 | (21,462,000 | ) | 3,511,000 | ||||||||||
| Income (loss) from discontinued operations, net of tax | - | (240,000 | ) | 2,129,000 | (1,442,000 | ) | ||||||||||
| Net (loss) income | (6,675,000 | ) | 4,942,000 | (19,333,000 | ) | 2,069,000 | ||||||||||
| Loss from continuing operations attributed to noncontrolling interest | 77,000 | 126,000 | 336,000 | 307,000 | ||||||||||||
| Net (loss) income attributable to common stockholders | (6,598,000 | ) | 5,068,000 | (18,997,000 | ) | 2,376,000 | ||||||||||
| (Loss) earnings per common share – continuing operations: | ||||||||||||||||
| Basic | $ | (0.09 | ) | $ | 1.16 | $ | (0.50 | ) | $ | 1.36 | ||||||
| Diluted | $ | (0.09 | ) | $ | 0.68 | $ | (0.50 | ) | $ | 0.98 | ||||||
| (Loss) earnings per common share - discontinued operations: | ||||||||||||||||
| Basic | $ | - | $ | (0.05 | ) | $ | 0.05 | $ | (0.51 | ) | ||||||
| Diluted | $ | - | $ | (0.03 | ) | $ | 0.05 | $ | (0.37 | ) | ||||||
| Shares used in computing loss (earnings) per common share: | ||||||||||||||||
| Basic | 71,157,697 | 4,582,374 | 42,015,662 | 2,811,336 | ||||||||||||
| Diluted | 71,157,697 | 7,805,629 | 42,015,662 | 3,893,597 | ||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue: | ||||||||||||||||
| Printed products | $ | 2,971,000 | $ | 2,119,000 | $ | 8,405,000 | $ | 8,433,000 | ||||||||
| Technology sales, services and licensing | 483,000 | 498,000 | 1,319,000 | 1,424,000 | ||||||||||||
| Direct marketing | 715,000 | - | 1,793,000 | - | ||||||||||||
| Total revenue | 4,169,000 | 2,617,000 | 11,517,000 | 9,857,000 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | 2,637,000 | 1,786,000 | 7,077,000 | 6,702,000 | ||||||||||||
| Selling, general and administrative (including stock based compensation) | 3,675,000 | 1,713,000 | 8,162,000 | 4,602,000 | ||||||||||||
| Depreciation and amortization | 246,000 | 298,000 | 824,000 | 844,000 | ||||||||||||
| Total costs and expenses | 6,558,000 | 3,797,000 | 16,063,000 | 12,148,000 | ||||||||||||
| Operating loss | (2,389,000 | ) | (1,180,000 | ) | (4,546,000 | ) | (2,291,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 10,000 | 7,000 | 61,000 | 11,000 | ||||||||||||
| Interest expense | (29,000 | ) | (49,000 | ) | (101,000 | ) | (104,000 | ) | ||||||||
| Unrealized gain on marketable securities | 7,782,000 | - | 8,365,000 | - | ||||||||||||
| Amortization of deferred financing costs and debt discount | (8,000 | ) | - | (8,000 | ) | (2,000 | ) | |||||||||
| Income (loss) before income taxes | 5,366,000 | (1,222,000 | ) | 3,771,000 | (2,386,000 | ) | ||||||||||
| Income tax expense (benefit) | - | - | - | - | ||||||||||||
| Income (loss) from continuing operations | 5,366,000 | (1,222,000 | ) | 3,771,000 | (2,386,000 | ) | ||||||||||
| Loss from discontinued operations | (424,000 | ) | (29,000 | ) | (1,702,000 | ) | (346,000 | ) | ||||||||
| Net income (loss) | 4,942,000 | (1,251,000 | ) | 2,069,000 | (2,732,000 | ) | ||||||||||
| Loss attributed to noncontrolling interest | 126,000 | - | 307,000 | - | ||||||||||||
| Net income (loss) from continuing operations attributable to common stockholders | 5,492,000 | (1,222,000 | ) | 4,078,000 | (2,386,000 | ) | ||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Interest rate swap loss | - | - | - | (15,000 | ) | |||||||||||
| Settlement of interest rate swap | - | - | - | 22,000 | ||||||||||||
| Comprehensive income (loss): | 4,942,000 | (1,251,000 | ) | 2,069,000 | (2,725,000 | ) | ||||||||||
| Earnings (loss) per common share - continuing operations: | ||||||||||||||||
| Basic | $ | 1.20 | $ | (1.53 | ) | $ | 1.45 | $ | (3.17 | ) | ||||||
| Diluted | $ | 0.70 | $ | (1.53 | ) | $ | 1.05 | $ | (3.17 | ) | ||||||
| Loss per common share - discontinued operations: | ||||||||||||||||
| Basic | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.61 | ) | $ | (0.46 | ) | ||||
| Diluted | $ | (0.05 | ) | $ | (0.04 | ) | $ | (0.44 | ) | $ | 0.46 | |||||
| Shares used in computing earnings (loss) per common share: | ||||||||||||||||
| Basic | 4,582,374 | 800,881 | 2,811,336 | 753,706 | ||||||||||||
| Diluted | 7,805,629 | 800,881 | 3,893,597 | 753,706 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 4 |
DOCUMENT SECURITY SYSTEMS,DSS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income from continuing operations | $ | (21,462,000 | ) | $ | 3,511,000 | |||
| Adjustments to reconcile net (loss) income from continuing operations to net cash used by operating activities: | ||||||||
| Depreciation and amortization | 2,075,000 | 812,000 | ||||||
| Stock based compensation | 74,000 | 181,000 | ||||||
| Loss on equity method investment | 2,556,000 | - | ||||||
| Loss (gain) on investments | 10,894,000 | (8,365,000 | ) | |||||
| Gain on extinguishment of debt | (116,000 | ) | - | |||||
| Deferred tax benefit | (4,315,000 | ) | - | |||||
| Accretion of debt discount, origination fee and prepaid interest | (2,287,000 | ) | ||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | 829,000 | 716,000 | ||||||
| Inventory | (1,580,000 | ) | (1,147,000 | ) | ||||
| Prepaid expenses and other current assets | (277,000 | ) | (678,000 | ) | ||||
| Other assets | (25,000 | ) | 1,321,000 | |||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | 432,000 | (99,000 | ) | |||||
| Accrued expenses | 1,808,000 | 43,000 | ||||||
| Other liabilities | (1,054,000 | ) | 859,000 | |||||
| Net cash used by operating activities | (12,448,000 | ) | (2,846,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | (2,816,000 | ) | (99,000 | ) | ||||
| Purchase of real estate | (6,565,000 | ) | - | |||||
| Purchase of investment | (19,026,000 | ) | (100,000 | ) | ||||
| Purchase of marketable securities | (8,789,000 | ) | (6,581,000 | ) | ||||
| Acquisition of American Pacific Bancorp, Inc. | 1,235,000 | |||||||
| Purchase of equity investment | (1,276,000 | ) | - | |||||
| Sale of marketable securities | 9,185,000 | - | ||||||
| Note receivable investment | (24,048,000 | ) | (574,000 | ) | ||||
| Purchase of intangible assets | (1,115,000 | ) | 111,000 | |||||
| Net cash used by investing activities | (53,215,000 | ) | (7,243,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments of long-term debt | (1,893,000 | ) | (144,000 | ) | ||||
| Borrowings of long-term debt | 7,102,000 | 1,272,000 | ||||||
| Payments of revolving lines of credit, net | - | (500,000 | ) | |||||
| Deferred financing fees | (186,000 | ) | - | |||||
| Issuances of common stock, net of issuance costs | 121,737,000 | 20,149,000 | ||||||
| Net cash provided by financing activities | 126,760,000 | 20,777,000 | ||||||
| Cash flows from discontinued operations: | ||||||||
| Cash provided (used) by discontinued operations | 207,000 | (438,000 | ) | |||||
| Cash provided by investing activities | 3,000,000 | 876,000 | ||||||
| Cash used by financing activities | - | (577,000 | ) | |||||
| Net cash provided (used) by discontinued operations | 3,207,000 | (139,000 | ) | |||||
| Net increase in cash | 64,304,000 | 10,549,000 | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 5,183,000 | 1,096,000 | ||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 69,487,000 | $ | 11,645,000 | ||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | 3,771,000 | $ | (2,386,000 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used by operating activities: | ||||||||
| Depreciation and amortization | 824,000 | 844,000 | ||||||
| Stock based compensation | 216,000 | 331,000 | ||||||
| Unrealized gain on marketable securities | (8,365,000 | ) | - | |||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | 1,149,000 | 204,000 | ||||||
| Inventory | (1,147,000 | ) | (268,000 | ) | ||||
| Prepaid expenses and other current assets | (671,000 | ) | (156,000 | ) | ||||
| Other assets | 434,000 | - | ||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | (117,000 | ) | 266,000 | |||||
| Accrued expenses | 252,000 | (363,000 | ) | |||||
| Other liabilities | 859,000 | (1,453,000 | ) | |||||
| Net cash used by operating activities | (2,795,000 | ) | (2,981,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | (103,000 | ) | (602,000 | ) | ||||
| Purchase of marketable securities | (6,581,000 | ) | - | |||||
| Purchase of investment | (100,000 | ) | - | |||||
| Note receivable investment | (574,000 | ) | - | |||||
| Purchase of intangible assets | 111,000 | (358,000 | ) | |||||
| Net cash used by investing activities | (7,247,000 | ) | (960,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments of long-term debt | (144,000 | ) | (120,000 | ) | ||||
| Borrowings of long-term debt | 1,272,000 | 588,000 | ||||||
| Payments of revolving lines of credit, net | (500,000 | ) | - | |||||
| Borrowings from convertible of note | - | 500,000 | ||||||
| Issuances of common stock, net of issuance costs | 20,149,000 | 5,042,000 | ||||||
| Net cash provided by financing activities | 20,777,000 | 6,010,000 | ||||||
| Cash flows from discontinued operations: | ||||||||
Cash used by operations - discontinued operations | (489,000 | ) | (305,000 | ) | ||||
Cash provided (used) by investing activities | 880,000 | (221,000 | ) | |||||
Cash used by financing activities | (577,000 | ) | (74,000 | ) | ||||
| Net cash used by discontinued operations | (186,000 | ) | (600,000 | ) | ||||
| Net increase in cash | 10,549,000 | 1,469,000 | ||||||
| Cash at beginning of period | 1,096,000 | 2,448,000 | ||||||
| Cash at end of period | $ | 11,645,000 | $ | 3,917,000 | ||||
See accompanying notes to the condensed consolidated financial statements.
| 5 |
DOCUMENT SECURITY SYSTEMS,DSS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)(unaudited)
Stock Shares | Amount | Stock Shares | Amount | Paid-in Capital | Shareholder distribution | Interest in Subsidiary | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
| Common | Preferred | Additional | Non- controlling | |||||||||||||||||||||||||||||||||
Stock Shares | Amount | Stock Shares | Amount | Paid-in Capital | Shareholder distribution | Interest in Subsidiary | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 5,836,000 | $ | 116,000 | 43,000 | $ | 1,000 | $ | 174,380,000 | $ | - | $ | 3,430,000 | $ | (101,382,000 | ) | $ | 76,545,000 | |||||||||||||||||||
| Issuance of common stock, net | 21,834,000 | 436,000 | - | - | 60,632,000 | - | - | - | 61,068,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | 15,000 | - | - | - | 15,000 | |||||||||||||||||||||||||||
| Conversion of preferred stock | - | |||||||||||||||||||||||||||||||||||
| Acquisition of American Pacific Bancorp | ||||||||||||||||||||||||||||||||||||
| Acquisition of American Pacific Bancorp, shares | ||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock, net | ||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock, net, shares | ||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock, shares | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (31,000 | ) | (3,981,000 | ) | (4,012,000 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | 27,670,000 | $ | 552,000 | 43,000 | $ | 1,000 | $ | 235,027,000 | $ | - | $ | 3,399,000 | $ | (105,363,000 | ) | $ | 133,616,000 | |||||||||||||||||||
| Issuance of common stock, net | 33,350,000 | 668,000 | - | - | 45,080,000 | - | - | - | 45,748,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | (30,000 | ) | - | - | - | (30,000 | ) | |||||||||||||||||||||||||
| Conversion of preferred stock | 6,570,000 | 131,000 | (43,000 | ) | (1,000 | ) | (130,000 | ) | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (228,000 | ) | (8,418,000 | ) | (8,646,000 | ) | ||||||||||||||||||||||||
| Balance, June 30, 2021 | 67,590,000 | $ | 1,351,000 | - | $ | - | $ | 279,947,000 | $ | - | $ | 3,171,000 | $ | (113,781,000 | ) | $ | 170,688,000 | |||||||||||||||||||
| Issuance of common stock, net | 12,156,000 | 243,000 | - | - | 14,722,000 | - | - | 14,965,000 | ||||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | 13,000 | - | - | 13,000 | ||||||||||||||||||||||||||||
Acquisition of American Pacific Bancorp | - | - | - | - | - | 20,301,000 | - | 20,301,000 | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (77,000 | ) | (6,598,000 | ) | (6,675,000 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | 79,746,000 | $ | 1,594,000 | - | $ | - | $ | 294,682,000 | - | $ | 23,395,000 | $ | (120,379,000 | ) | $ | 199,292,000 | ||||||||||||||||||||
| Balance, December 31, 2019 | 1,206,000 | $ | 24,000 | - | - | $ | 115,560,000 | $ | - | - | $ | (103,281,000 | ) | $ | 12,303,000 | |||||||||||||||||||||
| Issuance of common stock, net | 863,000 | 18,000 | - | - | 4,036,000 | - | - | - | 4,054,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | 28,000 | - | - | - | 28,000 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (67,000 | ) | (1,900,000 | ) | (1,967,000 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2020 | 2,069,000 | $ | 42,000 | - | $ | - | $ | 119,624,000 | $ | - | $ | (67,000 | ) | $ | (105,181,000 | ) | $ | 14,418,000 | ||||||||||||||||||
| Issuance of common stock, net | 896,000 | 17,000 | - | - | 6,168,000 | - | - | 6,185,000 | ||||||||||||||||||||||||||||
| Stock based payments, net of tax effect | 30,000 | 1,000 | - | - | 266,000 | - | - | 267,000 | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (114,000 | ) | (792,000 | ) | (906,000 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2020 | 2,995,000 | $ | 60,000 | - | - | $ | 126,058,000 | $ | - | $ | (181,000 | ) | $ | (105,973,000 | ) | $ | 19,964,000 | |||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | 2,159,000 | 43,000 | - | - | 13,045,000 | - | - | - | 13,088,000 | |||||||||||||||||||||||||||
| Issuance of preferred stock, net | - | - | 47,000 | 1,000 | 35,187,000 | - | - | - | 35,188,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | 20,000 | - | - | - | 133,000 | - | - | - | 133,000 | |||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | - | (126,000 | ) | 5,068,000 | 4,942,000 | ||||||||||||||||||||||||||
| Balance, September 30, 2020 | 5,174,000 | $ | 103,000 | 47,000 | $ | 1,000 | $ | 174,423,000 | $ | - | $ | (307,000 | ) | $ | (100,905,000 | ) | $ | 73,315,000 | ||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-in | Non- controlling Interest in | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Subsidiary | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 | 1,206,000 | $ | 24,000 | - | - | $ | 115,560,000 | $ | - | $ | (103,281,000 | ) | $ | 12,303,000 | ||||||||||||||||||
| Issuance of common stock, net | 863,000 | 18,000 | - | - | 4,036,000 | - | - | 4,054,000 | ||||||||||||||||||||||||
| Issuance of preferred stock, net | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | . | 28,000 | - | - | 28,000 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (67,000 | ) | (1,900,000 | ) | (1,967,000 | ) | |||||||||||||||||||||
| Balance, March 31, 2020 | 2,069,000 | $ | 42,000 | - | - | $ | 119,624,000 | $ | (67,000 | ) | $ | (105,181,000 | ) | $ | 14,418,000 | |||||||||||||||||
| Issuance of common stock, net | 896,000 | 17,000 | - | - | 6,168,000 | - | - | 6,185,000 | ||||||||||||||||||||||||
| Issuance of preferred stock, net | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Stock based payments, net of tax effect | 30,000 | 1,000 | - | - | 266,000 | - | - | 267,000 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (114,000 | ) | (792,000 | ) | (906,000 | ) | |||||||||||||||||||||
| Balance, June 30, 2020 | 2,995,000 | $ | 60,000 | - | - | $ | 126,058,000 | $ | (181,000 | ) | $ | (105,973,000 | ) | $ | 19,964,000 | |||||||||||||||||
| Issuance of common stock, net | 2,159,000 | 43,000 | - | - | 13,045,000 | - | - | 13,088,000 | ||||||||||||||||||||||||
| Issuance of preferred stock, net | - | - | 47,000 | 1,000 | 35,187,000 | - | - | 35,188,000 | ||||||||||||||||||||||||
| Stock based payments, net of tax effect | 20,000 | - | - | - | 133,000 | - | - | 133,000 | ||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | (126,000 | ) | 5,068,000 | 4,942,000 | |||||||||||||||||||||||
| Balance, September 30, 2020 | 5,174,000 | $ | 103,000 | 47,000 | $ | 1,000 | $ | 174,423,000 | $ | (307,000 | ) | $ | (100,905,000 | ) | $ | 73,315,000 | ||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-in | Accumulated Other Comprehensive | Non- controlling Interest in | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Subsidiary | Deficit | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 581,000 | $ | 11,000 | - | - | $ | 107,962,000 | $ | (7,000 | ) | - | $ | (100,392,000 | ) | $ | 7,574,000 | ||||||||||||||||||||
| Issuance of common stock, net | 19,000 | - | - | - | 638,000 | - | - | - | 638,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | 31,000 | - | - | - | 31,000 | |||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (1,000 | ) | - | - | (1,000 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (451,000 | ) | (451,000 | ) | |||||||||||||||||||||||||
| Balance, March 31, 2019 | 600,000 | $ | 11,000 | - | $ | - | $ | 108,631,000 | $ | (8,000 | ) | $ | - | $ | (100,843,000 | ) | $ | 7,791,000 | ||||||||||||||||||
| Issuance of common stock, net | 373,000 | 7,000 | - | - | 4,880,000 | - | - | - | 4,887,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | - | - | - | - | 28,000 | - | - | - | 28,000 | |||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (14,000 | ) | - | - | (14,000 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,031,000 | ) | (1,031,000 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2019 | 973,000 | $ | 18,000 | - | $ | - | $ | 113,539,000 | $ | (22,000 | ) | $ | - | $ | (101,874,000 | ) | $ | 11,661,000 | ||||||||||||||||||
| Issuance of common stock, net | 17,000 | - | - | - | 162,000 | - | - | - | 162,000 | |||||||||||||||||||||||||||
| Stock based payments, net of tax effect | 15,000 | - | - | - | 221,000 | - | - | - | 221,000 | |||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 22,000 | - | - | 22,000 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,251,000 | ) | (1,251,000 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2019 | 1,005,000 | $ | 18,000 | - | $ | - | $ | 113,922,000 | $ | - | $ | - | $ | (103,125,000 | ) | $ | 10,815,000 | |||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 6 |
DOCUMENT SECURITY SYSTEMS,DSS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20202021
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The Company, incorporated in the state of New York in May 1984 has conducted business in the name of Document Security Systems, Inc. (theOn September 16, 2021, the board of directors approved an agreement and plan of merger with a wholly-owned subsidiary, DSS, Inc. (a New York corporation, incorporated in August 2020), for the sole purpose of effecting a name change from Document Security Systems, Inc. to DSS, Inc. This change became effective on September 30, 2021. DSS, Inc. maintained the same trading symbol “DSS” and updated its CUSIP number to 26253C 102.
DSS, Inc. (together with its consolidated subsidiaries, referred to herein as “DSS,” “we,” “us,” “our” or the “Company”) currently operates eight (8)nine (9) distinct business lines through eight (8) DSS subsidiaries locatedwith operations and locations around the globe. These business lines are: (1) Premier Packaging, (2) IP Monetization, (3) Direct Marketing/Online Sales Group, (4) Blockchain Technology, (5) Securities and Fintech Group, (6) BioHealth Group, (7) Secure Living, (8) Energy Group, and (9) Investment Banking. Each of these business lines are in different stages of development, growth, and income generation.
Of the eight subsidiaries, threenine business lines, two of the those have historically been the led by core subsidiaries of the Company: (1) Premier Packaging Corporation (DSS Packaging and Printing Group), (2) DSS Digital Inc.(“Premier Packaging”), and its subsidiaries (DSS Digital Group), and (3)(2) DSS Technology Management, Inc. (DSS Technology Management)(“IP Monetization”). Premier Packaging Corporation operates in the paper board folding carton, smart packaging, and document security printing markets. It markets, manufactures, and sells paper productssophisticated custom folding cartons, mailers, photo sleeves, and complex 3-dimensional direct mail solutions designed to protect valuable information from unauthorized scanning, copying,provide functionality, marketability, and digital imaging. DSS Digital Inc., researches, develops, marketssustainability to product packaging while providing counterfeit protection and sells the Company’s digital products worldwide. The primary product is AuthentiGuard®, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions.consumer engagement platform. DSS Technology Management Inc., manages, licenses, and acquires intellectual property (“IP”) assets for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships, and commercial litigation. The activities surrounding our IP Technology Management segment have significantly decreased. In 2020, under its (4)(3) Decentralize Sharing Systems, Inc. (“Decentralized”) subsidiary, the Company created a fourththird business segment, Direct Marketing.Marketing/Online Sales Group (“Direct”). This group provides services to assist companies in the growing gig economic business model of peer-to-peer direct marketing. Direct specializes in marketing or network marketing is designedand distributing its products and services through its subsidiaries, partner networks, and online marketplaces. Products include health and wellness for personal care, healthy living and lifestyle, and travel. Direct will also help to sell products orsupport the direct selling industry by offering services directly to the public through independent distributors, rather than selling through the traditional retail market.its piers that streamline operations, enhance financing, and provide back-end business continuity.
In addition to the fourthree business lines and subsidiaries listed above, in 20192020 and early 2020,2021, DSS has created fivefour new business lines, and wholly owned subsidiaries. (5)(4) Blockchain Technology, led by DSS Blockchain Security, Inc.Inc (“DSS Blockchain”)., a Nevada corporation, that intends to specializespecializes in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber securities across global markets. (6)(5) Securities and Fintech, led by DSS Securities, Inc. (“DSS Securities”), a Nevada corporation, has beenwas established to develop and/or to acquire assets and investments in the securities trading and/or funds management arena,arena. Further, Securities, in partnership with recognized global leaders in alternative trading systems, intends to own and to pursue two parallel streams ofoperate in the US a single or multiple vertical digital asset exchanges in multiple jurisdictions: (i) securitized token exchanges, focusing on digitizedfor securities, tokenized assets, from different vertical industries and (ii) utilities token exchanges, focusing on “blue-chip” utility tokens, stable coins and cryptocurrency via a digital asset trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, STO and UTO listings on a primary market(s), asset digitization/tokenization (securities, currency and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). Also in this segment is the Company’s real estate investment trust (“REIT”), organized for the purposes of acquiring hospitals and other acute or post-acute care centers from solid businesses. (7)leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. (6) BioHealth Group, led by DSS BioHealth Security, Inc. (“DSS BioHealth”), a Nevada corporation, is our business line which we will intend to invest in or to acquire companies related to the biohealthbio-health and biomedical field, including businesses focused on the research to advance drug discovery and development for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. This new division will place special focus on open-air defense initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis and influenza, among others. (8)(7) Secure Living, led by DSS Secure Living, Inc. (“DSS Secure Living”), a Nevada Corporation, intends towill develop top of the line advanced technology, energy efficiency, quality of life living environments and home security for everyone for new construction and renovations of residential single and multifamily living facilities. Aside from Decentralized Sharing Systems, Inc. theThe activity in the these newly created subsidiaries haveDSS Blockchain and DSS Secure Living has been minimal or in various start-up or organizational phases.
On March 3, 2020, (8) Energy Group, organized under the Company, via itsCompany’s subsidiary DSS Securities, entered intoAlset Energy, Inc., a share subscription agreementTexas corporation, has been established to help lead the Company’s clean energy future with a focus on environmental responsibility and loan arrangement with LiquidValue Asset Management Pte Ltd.sustainability measures. (9) Investment Banking, created in September 2021 as part of the Company’s acquisition of American Pacific Bancorp. Inc., AMRE Asset Management, Inc. and American Medical REIT Inc. under which it acquired a 52.5% controlling ownership interest in AMRE Asset Management Inc. (“AAMI”) which currently has a 93% equity interest in American Medical REIT Inc. (“AMRE”) (see Note 4).
AAMITexas corporation, is a real estate investment trust (“REIT”) management company that sets the strategic vision and formulate investment strategy for AMRE. It manages the REIT’s assets and liabilities and provides recommendations to AMRE on acquisition and divestments in accordance with the investment strategies. American Medical REIT, Inc is a Maryland corporation, organized for the purposes of being a financial network holding company, focused on providing commercial loans and acquiring hospitalsequity positions in (i) undervalued commercial bank(s), bank holding companies and other acute or post-acute care centers from leading clinical operators with dominant market sharenonbanking licensed financial companies operating in secondarythe United States, South East Asia, Taiwan, Japan and tertiary markets,South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, each property to a single operator under a triple-net lease. AMRE was formed to originate, acquire,problem asset management, SPAC (special purpose acquisition company) consulting, and lease a credit-centric portfolioadvisory capital raising services. From this financial platform, the Company shall provide an integrated suite of licensed medical real estate. AMRE is planned to qualify as a Real Estate Investment Trustfinancial services for federal income tax purposes, which will provide. AMRE’s investorsbusinesses that shall include commercial business lines of credit, land development financing, inventory financing, third party loan servicing, and services that address the opportunity for direct ownershipfinancial needs of Class A licensed medical real estate. As of September 30, 2020 has not yet closed on any acquisition.the world Gig Economy.
On August 21, 2020, Document Security Systems, Inc. (the “Company”),the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc. (“DSS BioHealth”), Alset International Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued shares of the Company’s common stock, par value $0.02$ per share, nominally valued at $6.48$ per share, and newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary (see Note 4)5).
| 7 |
Impact BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions that have been plaguing the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertook a concerted effort in the research and development (R&D), drug discovery and development for the prevention, inhibition, and treatment of neurological, oncological, and immune related diseases.
In August 2020On September 9, 2021, the Company finalized a stock purchase agreement (the “SPA”) with American Pacific Bancorp, Inc. (“APB”), which provided for an investment of $40,000,200 by the Company into APB for an aggregate of shares of the APB’s Class A Common Stock, par value $per share. Subject to the terms and conditions contained in the SPA, the shares issued at a purchase price of $per share. As a result of this transaction, DSS became the majority owner of APB. (see Note 5).
On September 13, 2021, the Company finalized a shareholder agreement and joint venture between its subsidiary, DSS Financial Management, Inc. (“DFMI”) and HR1 Holdings Limited (“HR1”), a company incorporated in the British Virgin Islands, for the purpose to operate a vehicle for private and institutional investors seeking a highly liquid investment fund with attractive risk adjusted returns relative to market unpredictability and volatility. Under the terms of this agreement, 4000 shares or 40% of the Company’s wholly owned subsidiary DSS Securities, Inc. enteredLiquid Asset Limited Management Limited (“LVAM”), a Hong Kong company was transferred to HR1 whereas at the conclusion of the transaction DFMI would own 60% of LVAM and HR1 would own 40%. LVAM executes within reliable platforms and broad market access and uses proprietary systems and algorithms to trade liquid exchange-traded funds (ETFs), stocks, futures or crypto. Aimed at providing consistent returns while offering the unique ability to liquidate the portfolio within 5 to 10 minutes under normal market conditions, LVAM provides an array of advanced tools and products enabling customers to explore multiple opportunities, strengthen and diversify their portfolios, and meet their individual investing goals. LVAM had minimal activity at September 30, 2021, which have been consolidated into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”). DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process.accompanying financial statements.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments considered necessary for their fair presentation in accordance with U.S. GAAP. All significant intercompany transactions have been eliminated in consolidation.
Interim results are not necessarily indicative of results expected for the full year. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2019.2020.
Principles of Consolidation - The consolidated financial statements include the accounts of Document Security Systems, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable, convertible notes receivable, inventory, fair values of investments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants to purchase the Company’s common stock, preferred stock, deferred revenue and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Reclassifications - Certain amounts on the accompanying consolidated balance sheets for the year ended December 31, 20192020, have been reclassified to conform to current yearperiod presentation.
| 8 |
Cost and Equity Method Investments
Restricted cash – In accordanceAmounts included in restricted cash at September 30, 2021, represents customer deposits placed in escrow with ASC 325-20, Cost Method Investments, a subsidiary of the Company, Alset Title, Inc., in connection with potential real estate acquisitions.
Notes receivable, unearned interest, and related recognition - The Company records itsall future payments of principal and interest on notes as notes receivable, which are then offset by the amount of any related unearned interest income. For financial statement purposes, the Company reports the net investment in common stock of BMI Capital International LLC, a Texas limited liability company, at costthe notes receivable on the consolidated balance sheet as current or long-term based on the fair market valuematurity date of the underlying notes. Such net investment is comprised of the amount advanced on the loans, adjusting for net deferred loan fees or costs incurred at origination, amounts allocated to warrants received upon origination, and any payments received in advance. The unearned interest is recognized over the term of the notes and the income portion of each note payment is calculated so as to generate a constant rate of return on the net balance outstanding. Net deferred loan fees or costs, together with discounts recognized in connection with warrants acquired at origination, are accreted as an adjustment to yield over the term of the loan.
Investments– Investments in equity securities with a readily determinable fair value, not readily determinable. As of June 30, 2020,accounted for under the Company classified its approximate 17% investment in Sharing Services Global Corp. (“SHRG”), a publicly traded company, as marketable equity security and measured itmethod, are recorded at fair value with unrealized gains and losses recognizedincluded in other income. In July 2020, through continued acquisition of common stock, the Company obtain greater than 20% ownership of SHRG, and thus has the ability to exercise significant influence over it. The Company accounts for investments in which the Company owns more than 20% or has the ability to exercise significant influence of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures. The Company evaluates investment for indications of impairment at least annually. See Note 5 for further details on investments.
Marketable Securities – The Company’s investments in marketableearnings. For equity securities are classified based on the nature of the securities. Marketable securities are classified as long-term assets on the consolidated balance sheets as the Company has the intent and ability to hold the investments forwithout a period of at least one year. The Company’s marketable equity securities are measured atreadily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses recognizedincluded in other income (expense).earnings.
For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. See Note 56 for further detailsdiscussion on investments and marketable securities.investments.
Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets.
● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying amounts reported in the balance sheet of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities classify as a Level 1 fair value financial instrument. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes do not reflect recent market conditions. The fair value of revolving credit lines notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. The fair value of investments carried at cost less impairment; however,where the fair value is not considered readily determinable, based on the lack of liquidity for the shares owned.are carried at cost.
Impairment of Long-Lived Assets and Goodwill- The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value. Consistent with this accounting impairment analysis, the Company determined that due to many factors, including the impact of the COVID-19 outbreak and the related closing of the operations of the Plastic Group, the Company has quantitatively tested the carrying value of its goodwill associated with the DSS Plastics Group and determined that an impairment of the DSS Plastics’ goodwill had occurred and the Company recorded a full goodwill impairment of $685,000 during the nine months ended September 30, 2020. This impairment has been included in the calculation of the discontinued operations of DSS Plastics group.
Related Party Liabilities - The– On April 1, 2020 the Company’s HWH World, Inc subsidiary has a service agreement pending with HWH Korea, a subsidiary of Alset International Limited (“Alset Intl.”) (formally Singapore eDevelopment Limited),. The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and thusChief Executive Officer of Alset Intl. Mr. Chan is also the majority shareholder of Alset Intl as well as the largest shareholder of the Company. The Company also owns approximately shares of Alset Intl, a related party.company publicly listed on the Singapore Exchange Limited. This service agreement will allow HWH Korea to utilize the Company’s merchant account in connection with their direct marketing network with periodic remittance of the cash collected to them.them for a fee of 2.5% of amounts collected. As of September 30, 2020,2021, the Company hashad collected approximately $774,000$0 as compared to $1,100,000 as of December 31, 2020, on behalf of HWH Korea, and will remit amounts during the fourth quarter. The related party liabilitywhich is included in “Other current liabilities”Accrued expenses and deferred revenue on the accompanying consolidated balance sheets.sheet. There were no amounts outstanding to this related party at September 30, 2021.
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Contingent Legal Expenses
Acquisitions - Contingent legal fees are expensedIn January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-01, Business Combinations (“Topic 805”): Clarifying the Definition of a Business (“ASU 2017-01”). The guidance is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. Under this guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the consolidated statements of operations inset is not a business. If the periodthreshold is not met, the entity then evaluates whether the set meets the requirement that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, the Company may be liable for certain out of pocket legal costs incurred pursuanta business include, at a minimum, an input and a substantive process that together significantly contribute to the underlying legal services agreement that will be paid out fromability to create outputs. See Note 5 regarding the proceeds from settlements or licenses that arise pursuant to an enforcement action, which will be expensed as legal fees in the period in which the payment of such fees is probable. Any unamortized patent acquisition costs will be expensed in the period a conclusion is reached in an enforcement action that does not yield future royalties potential.acquisitions.
Business Combinations - Business combinations and non-controlling interests are recorded in accordance with FASB ASC 805 Business Combinations. Under the guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition.acquisition and all acquisition costs are expensed as incurred. The excess of the purchase price over the estimated fair values is recorded as goodwill. If the fair value of the assets acquired exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded. Under the guidance, all acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset. The application of business combination accounting requires the use of significant estimates and assumptions.
Acquisition of assets are recorded at their relative fair value based on total accumulated costs of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets. This includes all costs related to finding, analyzing and negotiating a transaction. The allocation of the purchase price is an area that requires judgment and significant estimates. Tangible and intangible assets include land, building and improvements, furniture, fixtures and equipment, acquired above market and below market leases, in-place lease value (if applicable). Acquisition-date fair values of assets and assumed liabilities are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information.
Discontinued Operations – On April 20, 2020, the Company executed a nonbinding letter of intent with a perspective buyer for the sale of certain assets of its plastic printing business line, which it operated under Plastic Printing Professionals, Inc. (“DSS Plastics”), a wholly-ownedwholly owned subsidiary of the Company. That sale was consummated and closed on August 14, 2020. The remaining assets of DSS Plastics were either sold, separately disposed, or retained by other existing DSS businesses lines. Accordingly, the operations of DSS Plastics have been discontinued. Based on the magnitude of DSS Plastics’ historical revenue to the Company and because the Company has exited the production of laminated and surface printed cards, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for this sale as required by Accounting Standards Codification 210-05—Discontinued Operations. The major classes of assets and liabilities of DSS Plastics are classified as Held For Sale – Discontinued Operations on the Consolidated Balance Sheets and the operating results of the discontinued operations is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss) as Loss from Discontinued Operations. See Note 10.11.
Reverse Stock Split - On May 4, 2020, Document Security Systems, Inc. (the “Company”) held a Special Meeting of Stockholders (the “Special Meeting”) at which the Company’s stockholders approved amendment to the Company’s certificate of incorporation to effect a reverse split of common stock of the Company by a ratio of 1-for-30 (the “Reverse Split”) with the effectiveness of such amendment to be determined by the Board of Directors of the Company (the “Board”). The form of the certificate of amendment to effect the Reverse Split was subsequently approved by the Board on May 4, 2020. On May 7, 2020,2021, the Company filed a Certificatecompleted the sale of Amendment of Certificate of Incorporation (the “Amendment”) with the Secretary of State100% of the Statecapital stock of New York to effect a 1-for-30 reverse stock split ofDSS Digital Inc. (“DSS Digital”), the Company’s outstanding common stock. The Amendment was effective at 5:01 p.m. Eastern Timewholly owned subsidiary, which researched, developed, marketed, and sold the Company’s digital products worldwide. Based on May 7, 2020 (the “Effective Time”). The reverse stock splitthe magnitude of DSS Digital’s historical revenue to the Company and because the Company has been retroactivelyexited the brand authentication services, functional anti-counterfeiting technology and technologies to satisfy commercial and consumer product needs for branding, intelligent packaging, and marketing, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied to all financial statements presented.discontinued operations treatment for this sale as required by Accounting Standards Codification 210-05—Discontinued Operations. See Note 11.
Concentration of Credit Risk - The Company maintains its cash in bank and brokerage deposit accounts, which at times may exceed federally insured limits. To address this potential risk, theThe Company (i) periodically evaluates the financial soundness of the banks and brokerage agencies with which it holds deposit and (ii) has spread its cash holdings over multiple banks and brokerage companies to diversify the risk. As a result, management does not believe thatbelieves it is materiallynot exposed to any significant credit risk as a result of any potential insolvency of anynon-performance by the financial institution(s).institutions.
During the nine months ended September 30, 2020,2021, two customers accounted for approximately 21% and 16%, respectively, 43% of our consolidated revenue. As of September 30, 2021, these two customers accounted for 73% of our consolidated trade accounts receivable balance. During the Company’snine-months ended September 30, 2020, these two customers accounted for 37% of our consolidated revenue and accounted for 36% and 12%, respectively,48% of the Company’sour consolidated trade accounts receivable balance as of September 30, 2020. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers, the short duration of its payment terms for most of its customer contracts and by the diversification of its customer base.balance.
Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense.
Recent Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.
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In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”, which eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. The standards update is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 and has been adopted by the Company effective January 1, 2020.
Impact of COVID-19 Outbreak - The COVID-19 pandemic has created global economic turmoil and has potentially permanently impacted how many businesses operate and how individuals will socialize and shop in the future. We continue to feel the effect of the COVID-19 business shutdowns and consumer stay-at-home protections. But the effect of the economic shutdown has impacted our business lines differently;differently, some more severely than others. In most cases, we believe the negative economic trends and reduced sales will recover over time. However, management determined that one of its business lines, DSS Plastics, had been, and would continue to be, more severely impacted by the pandemic than our other divisions, and we did not believe this was a short-term phenomenon. We expected that this business would be permanently impacted because we believe that both consumer and corporate future travel habits will be negatively impacted and, as a result, use of hotel access cards will be diminished. We believe that conventions and sporting events will be fewer and smaller in attendance, and therefore demand for our card identification products would be reduced. Further, we believe that physical security cards and individual IDs will be replaced by more digital and optical technologies. As a result, management decided to fully impair its goodwill related to DSS Plastics during the first quarter 2020, and to exit this business line. The impact of this decision in our first quarter 2020 earnings and for year-to-date earnings for the 9 months ended September 30, 2020 was an impairment of approximately $685,000.
Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other long-lived assets and current obligationsobligations.
Continuing Operations and Going Concern – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. While the Company has approximately $11.6 million in cash, and a positive working capital position of approximately $13.3 million as of September 30, 2020, the Company has incurred operating losses as well as negative cash flows from operating and investing activities over the past two years.
To continue as a going concern, during the nine months ended September 30, 2020, the Company through multiple underwriting agreements with Aegis Capital Corp., acting as representative of the several underwriters, provided the issuance and sale by the Company in an underwritten public offering (the “Offering”) shares of the Company’s common stock. The net offering proceeds to the Company approximated $20.1 million.
The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes, among other things, continued growth among our operating segments, and tightly controlling operating costs and reducing spending growth rates wherever possible to return to profitability. In addition, the Company has taken steps, and will continue to take measures, to materially reduce the expenses and cash burn at all corporate and business line levels. During the nine months ended September 30, 2020, material steps were taken to materially reduce or eliminate cash burns in the IP Monetization program, the DSS Digital Group and the DSS Plastics group.
At the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments, our $11.6 million in aggregate cash and equivalents as of September 30, 2020, would allow us to fund our eight business lines current and planned operations through October 2021. Based on this, the Company has concluded that substantial doubt of its ability to continue as a going concern has been alleviated.
2. Revenue
The Company recognizes its products and services revenue based on when the title passes to the customer or when the service is completed and accepted by the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for shipped product or service provided. Sales and other taxes billed and collected from customers are excluded from revenue. The Company also derivesrecognizes rental income associated with its REIT, including rental abatements and contractual fixed increases attributable to operating leases, where collection has been considered probable, on a straight-line basis over the term of the related lease. The Company generates revenue from royalties from third parties which are typically based on licensees’ netits direct marketing line of business primarily through internet sales of products that utilize the Company’s technology, or on a per item usage of the technology on the customers’ printed products. The Company recognizes license revenue at the time it is reported by the licensee. From time to time, the Company generates license revenues through litigation settlements. For these, the Companyand recognizes revenue upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.as items are shipped.
As of September 30, 2020,2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company has applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less.
Accounts Receivable
The Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and generally does not require collateral. Payment terms are generally 30 days but up to net 105 for certain customers. The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history of past write-offs and collections and an analysis of current credit conditions. At September 30, 2020,2021, the Company established a reserve for doubtful accounts of approximately $23,000$84,000 ($41,00025,000 – December 31, 2019)2020). The Company does not accrue interest on past due accounts receivable.
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Sales Commissions
Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized as of September 30, 2020.2021.
Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.
See Note 1214 for disaggregated revenue information.
3. Notes Receivable
Century TBD Holdings, LLC
On October 10, 2019, the Company entered into a convertible promissory note (“TBD Note”) with Century TBD Holdings, LLC (“TBD”), a Florida limited liability company. The Company loaned the principal sum of $500,000,$500,000, of which up to $500,000 $500,000 and all accrued interest can be paid by an “Optional Conversion” of such amount up to 19.8%19.8% (non-dilutable) of all outstanding membership interest in TBD. This TBD Note accrues interest at 6%6% and matures on October 9, 2021.2021. As of September 30, 20202021, and December 31, 20192020, this TBD Note had outstanding principal and interest of approximately $529,000$537,000. This asset was classified as Current portion of notes receivable on the consolidated balance sheet as September 30, 2021, and $507,000, respectively.
On October 9, 2019 and November 11, 2019as Notes receivable on the Company’s subsidiary Decentralized Sharing Systems, Inc. entered into two, separate on demand, secured, convertible notes with RBC Life Sciences, Inc. (RBC), a Nevada corporation. The first Note, dated October 9th , lent the principal sum of $200,000 which accrued at a non-default interest rate of 6% with a scheduled maturity date of November 11, 2019 (“Note #1) This note also contains an “Optional Conversion” clause that allows the Company at any time, before or after the occurrence of an Event of Default, at its option, to convert the outstanding principal amount, plus accrued interest into a number of newly issued shares of its common stock equal to 75% of the total shares common stock that will be outstanding upon such conversion at a fully-diluted basis. Note #1 was also secured by and among other things a first lien on all of the assets of RBC and its subsidiaries, and was guaranteed by its subsidiary, RBC Life Sciences USA, Inc. Asconsolidated balance sheet as of December 31, 2019,2020.On December 30, 2020, the Company had advanced undersigned a binding letter of intent with West Park Capital, Inc (“West Park”) and TBD where the termsparties agreed to prepare a note and stock exchange agreement whereby DSS will assign the TBD Note to West Park and West Park shall issue to DSS a stock certificate reflecting 7.5% of the note the sum of $200,000.
The second Note (Note #2) dated November 11, 2019, established a secured, convertible, revolving line of credit to RBC up to an aggregate principal sum of $800,000, funded at the sole discretion of lender,issued and accruing at annual non-default interest rate of 10% with a scheduled maturity date of November 11, 2024, payable to Decentralized Sharing Systems’ wholly owned subsidiary, HWH World, Inc.. Accrued interest on the outstanding principal balance was scheduled to be paid monthly commencing on December 25, 2019. Further, any amount of principal repaid during the term of the note was allowed to be re-advanced at any time prior to the earlier of the acceleration of note to maturity or its maturity date. This note also contains an “Optional Conversion” feature that allows the Company, at any time, before or after the occurrence of an Event of Default, at its option, to convert the outstanding principal balance, plus accrued interest into a number of newly issued shares of its common stock equal to 100% of the outstanding shares of commonWest Park. This note and stock of RBC’s direct and indirect subsidiaries. This Note #2 was also secured by a 2nd lien on all ofexchange agreement is expected to be finalized sometime during the assets of RBC, behind the first lien securing Note #1, and a first lien on all of the assets of RBC’s multiple subsidiaries and the full guarantee of these subsidiaries. As of December 31, 2019, this Note #2 had an advanced and outstanding principal balance of $81,575.
On January 24, 2020, as a result of the borrower’s default on Note #1, Decentralized Sharing Systems, Inc. made demand for repayment of the outstanding balance of the Note #1. In partial resolution, Decentralized Sharing Systems, Inc and RBC agreed to accept and tender, respectively, pursuant to the Uniform Commercial Code Article 9, collateral in partial satisfaction of debt under the terms of Note#1. The Company chose to not exercise its option convert the outstanding principal and interest into equity, but instead elected to accept this specific collateral. On February 7, 2020, RBC agreed to the deed-in-lieu of specific assets in satisfaction of part of the amount owing under Note #1.
On April 8, 2020, the Company initiated Uniform Commercial Code Article 9 foreclosure proceedings against the remaining assets of RBC and its subsidiaries which culminated with an Article 9 public sale on April 23, 2020. Again, the Company chose to forego the optional conversion of the outstanding principal and interest into 100% ownership, as was allowed in the terms of the note. Instead it elected to pursue through a public foreclosure sale collateral that secured Note #2. At that April Article 9 public sale, HWH World, Inc was the high bidder, and the company received a Bill of Sale for all of the remaining assets of RBC. As a result of this foreclosure sale and the Note #1, collateral accepted in lieu of partial debt, the Company now owns and controls most of the former assets of RBC and its subsidiaries.
During the secondfourth quarter of 2020, the Company completed its evaluation of the assets acquired through foreclosure of Note 1 and 2 above and determined the value received supported the recoverability of the carrying value of the two notes. In accordance with Financial Accounting Standards Board Codification 310 Receivables Goodwill and Other, the assets value will be recorded at the carrying value of the debt, allocated based on the value identified. The carrying values of Note 1 and Note 2 were reclassed as property, plant, and equipment and other intangible assets in the amounts of $201,000 and $637,000 respectively within the accompanying financial statements. These amounts are being depreciated and amortized over their useful lives.2021.
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GSX Group Limited
4. Business Combination
On February 8, 2021, the Company entered into a convertible promissory note (“GSX Note”) with GSX Group Limited (“GSX”), a company registered in Gibraltar. The Company loaned the principal sum of $800,000, with principal and interest at a rate of 4%, due in one year from date of issuance. The outstanding principal and interest as of September 30, 2021, approximated $821,000, and is classified as a Current Asset on the Consolidated Balance Sheets at September 30, 2021. The GSX Note shall be converted, at the Company’s option, into shares of GSX at the conversion price of $1.05 per share.
On February 3, 2021, USX Holdings Company, Inc., a subsidiary of the Company entered into a binding joint venture term sheet (“GSX JV”) for the creation of a USA based joint venture alternative trading system or exchange (“JV Exchange”). During the nine-months ended September 30, 2021, the Company and GSX finalized the terms of the JV Exchange.
Dustin Crum
On February 21, 2021, Impact BioMedical, Inc. a subsidiary of the Company, entered into a promissory note (“Crum Note”) with Dustin Crum (“ Mr. Crum”). The Company loaned the principal sum of $206,000, with interest at a rate of 6.5%, and maturity date of August 19, 2022. Monthly payments are due on the twenty-first day of each month and continuing each month thereafter until August 19, 2022, at which time all accrued interest and the entire remaining principal shall be due and payable in full. This note is secured by certain real property situated in Collier County, Florida. The outstanding principal and interest as of September 30, 2021, approximated $197,000 and is classified in current notes receivable on the accompanying consolidated balance sheets.
Sharing Services Global Corporation
On April 5, 2021, Decentralized Sharing Systems, Inc., a subsidiary of the Company entered into a convertible promissory note (“SHRG Note”) with Sharing Services Global Corporation (“SHRG”), a company registered in the state of Nevada. The Company loaned the principal sum of $30,000,000, with interest at a rate of 8%, and shall be due and payable in full on demand by the Company, or if the demand is not sooner made, April 5, 2024. The interest shall be prepaid annually in cash or Class A Common Shares. At any time during the term of the SHRG Note, at the sole discretion of the Company, the outstanding principal can be converted in whole or in part into whole shares of SHRG Class A Common Stock at a conversion rate of $0.20. The Company received a $3,000,000 loan origination fee associated with this note which has been recorded as an offset to the SHRG Note and will be amortized monthly in the amount of approximately $83,000 through the term of the SHRG Note. Accordingly, in April 2021, the SHRG issued to the Company shares of its Class A Common Stock, including shares in payment of the loan origination fee and shares in prepayment of interest for the first year In addition, the Company received 150,000,000 warrants both issued and vested on April 5, 2021. These warrants have an exercise price of $0.22 and expire April 5, 2026. Under ASC 815 (“Topic 815”), the warrants received with the SHRG Note do not meet the definition of a derivative but do require treatment as an equity investment (See Note 6). Accordingly, the value of the note was allocated between current portion of notes receivable and other investments on the consolidated balance sheet. The SHRG Note was valued at $15,043,000 as of April 5, 2021, net of discount. As of September 30, 2021, the amortized value of the note approximates $16,830,000 and approximates fair value.
The Company, via three (3) of the Company’s existing board members, currently holds three (3) of the five (5) SHRG board of director seats. Mr. John “JT” Thatch, DSS’s Lead Independent Director and as well the CEO of SHRG is on the SHRG Board, along with Mr. Chan, DSS’s Executive Chairman of the board of directors (joined the SHRG Board effective May 4, 2020), and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective September 29, 2020).
Sentinel Brokers Company, Inc.
On May 13, 2021, a subsidiary of the Company entered a revolving credit promissory note (“Sentinel Note”) with Sentinel Brokers Company, Inc. (“Sentinel”), a company registered in the state of New York. The Sentinel Note has an aggregate principal balance up to $600,000, to be funded at request of Sentinel. The Sentinel Note, which incurs interest at a rate of 6.65% is payable in areas until the principal is paid in full at the maturity date of May 13, 2023. As of September 30, 2021, there is $0 outstanding on the Sentinel Note. Also on May 13, 2021, the Company entered into a stock purchase agreement (“Sentinel Agreement”) to acquire a 24.9% equity position of Sentinel for the purchase price of $300,000. See Note 6.
Puradigm, LLC
On May 14, 2021, DSS Pure Air, Inc. a subsidiary of the Company entered into a convertible promissory note (“Puradigm Note”) with Puradigm, LLC (“Puradigm”), a company registered in the state of Texas. The Puradigm Note has an aggregate principal balance up to $5,000,000, to be funded at request of Puradigm. The Puradigm Note, which incurs interest at a rate of 6.5% due quarterly, has a maturity date of May 14, 2023. The Puradigm Note contains an options conversion clause that allows the Company to convert all, or a portion of all, into new issued member units of Puradigm with the maximum principal amount equal to 18% of the total equity position of Puradigm at conversion. The outstanding principal and interest as of September 30, 2021, approximated $4,156,000. On October 8, 2021, the Company advanced an additional $400,000 toward the Puradigm Note.
Harris-Montgomery Counties Management District
On September 23, 2021, APB entered into refunding bond anticipatory note (“District Note”) with Harris-Montgomery Counties Management District (the “District”), which operates as a conservation and reclamation district pursuant to Chapter 3891, Texas Special District Local Laws Code; Chapter 375, Texas Local Government Code; and Chapter 49, Texas Water Code. The District Note was in the sum of $3,500,000 and incurs interest at a rate of 4.15% per annum. Principal and interest are due in full on September 22, 2022. This note may be redeemed prior to maturity with 10 days written notice to APB at a price equal to principal plus interest accrued on the redemption date.The District Note is included in current portion of notes receivable on the consolidated balance sheet at September 30, 2021.
4. Financial Instruments
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
The following tables show the Company’s cash, cash equivalents, restricted cash, and marketable securities by significant investment category as of September 30, 2021, and December 31, 2020:
Schedule of Cash and Marketable Securities by Significant Investment Category
| 2021 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | Cash, Cash Equivalents, and Restricted Cash | Marketable Securities | Investments | |||||||||||||||||||
| Cash and cash equivalents | $ | 51,438,000 | $ | - | $ | 51,438,000 | $ | 51,438,000 | $ | - | $ | - | ||||||||||||
| Restricted cash | 350,000 | - | 350,000 | 350,000 | - | - | ||||||||||||||||||
| Level 1 | ||||||||||||||||||||||||
| Money Market Funds | 17,699,000 | - | 17,699,000 | 17,699,000 | - | - | ||||||||||||||||||
| Marketable Securities | 6,608,000 | 2,599,000 | 9,207,000 | - | 9,207,000 | - | ||||||||||||||||||
| Level 2 | ||||||||||||||||||||||||
| Warrants | 15,657,000 | (9,121,000 | ) | 6,536,000 | - | - | 6,536,000 | |||||||||||||||||
| Total | $ | 91,752,000 | $ | (6,522,000 | ) | $ | 85,230,000 | $ | 69,487,000 | $ | 9,207,000 | $ | 6,536,000 | |||||||||||
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| 2020 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | Cash and Cash Equivalents | Marketable Securities | Investment | |||||||||||||||||||
| Cash and cash equivalents | $ | 1,690,000 | $ | - | $ | 1,690,000 | $ | 1,690,000 | $ | - | $ | - | ||||||||||||
| Level 1 | ||||||||||||||||||||||||
| Money Market Funds | 3,493,000 | - | 3,493,000 | 3,493,000 | - | - | ||||||||||||||||||
| Marketable Securities | 5,641,000 | 3,495,000 | 9,136,000 | - | 9,136,000 | - | ||||||||||||||||||
| Level 2 | ||||||||||||||||||||||||
| Warrants | 700,000 | 356,000 | 1,056,000 | - | - | 1,056,000 | ||||||||||||||||||
| Total | $ | 11,524,000 | $ | 3,851,000 | $ | 15,375,000 | $ | 5,183,000 | $ | 9,136,000 | $ | 1,056,000 | ||||||||||||
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
5. Acquisitions
American Medical REIT Inc.
On March 3, 2020, the Company, via its subsidiary DSS Securities, entered into a binding term sheet (the “Term Sheet”)share subscription agreement and loan arrangement with LiquidValue Asset Management Pte Ltd (“LVAM”)Ltd., AMRE Asset Management, Inc. and American Medical REIT Inc. under which it acquired a 52.5% controlling ownership interest in AMRE Asset Management Inc. (“AAMI”) andwhich currently has a 93% equity interest in American Medical REIT Inc. (“AMRE”), regarding. AAMI is a share subscription and loan arrangement. The Term Sheet set forth the terms of a proposed transaction to establish a medical real estate investment trust in(“REIT”) management company that sets the United Statesstrategic vision and AAMI providing certain services related toformulate investment strategy for AMRE. It manages the financialREIT’s assets and capital structure of AMRE. Pursuant to the Term Sheet, the Company has subscribed 5,250 ordinary shares of AAMI at a purchase price of $0.01 per share for total consideration of $52.50. Concurrently, AAMI will issue 2,500 shares to LVAM,liabilities and 1,250 sharesprovides recommendations to AMRE Tennessee, LLC, AAMI’s executive management’s holding company (collectively, the “Subscription Shares”). As a result, the Company now holds 52.5% of the outstanding shares of AAMI, with LVAMon acquisition and AMRE Tennessee, LLC, holding 35% and 12.5% of the remaining outstanding shares of AAMI, respectively. At the completion of the share subscription, AAMI has a 93% equity interestdivestments in AMRE. Also at the completion of the transaction, AAMI had no assets or liabilities. LVAM is an 82% owned subsidiary of Singapore eDevelopment Limited whose Chief Executive Office and largest shareholder is Heng Fai Ambrose Chan, the Chairman of the Board and largest shareholder of the Company.
Further, pursuant to and in connectionaccordance with the Term Sheet, effectiveinvestment strategies. AMRE is a Maryland corporation, organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. AMRE was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE is planned to qualify as a Real Estate Investment Trust for federal income tax purposes, which will provide. AMRE’s investors the opportunity for direct ownership of Class A licensed medical real estate.
Effective on March 3, 2020, the Company entered into a Promissory Note with AMRE, pursuant to which AMRE has issued the Company a promissory note for the principal amount of $800,000.00 (the$800,000 (the “Note”). The Note matures on March 3, 2022and accrues interest at the rate of 8.0%8.0% per annum and shall be payable in accordance with the terms set forth in the Note. Under the Note, AMRE may prepay or repay all or any portion of the Note at any time, without a premium or penalty. If not sooner prepaid, the entire unpaid principal balance of the Note including accrued interest will be due and payable in full on March 3, 2022. AMRE’s failure to pay any amount due on the Note within five days of when payment is due constitutes an event of default under the Note, pursuant to which the Company can declare the Note due and payable. The Note also provides the Company an option to provide AMRE an additional $800,000 $800,000 on the same terms and conditions as the Note, including the issuance of warrants as described below. As further incentive to enter into the Note, AMRE issued the Company warrants to purchase 160,000 shares of AMRE common stock (the “Warrants”). The Warrants have an exercise price of $5.00 $5.00 per share, subject to adjustment as set forth in the Warrants, and expire on March 3, 2024.2024. Pursuant to the Warrants, if AMRE files a registration statement with the Securities and Exchange Commission for an initial public offering (“IPO”) of AMRE’s common stock and the IPO price per share offered to the public is less than $10.00 $per share, the exercise price of the Warrants shall be adjusted downward to 50%50% of the IPO price. The Warrants also grants piggyback registration rights to the Company as set forth in the Warrants. As of September 30, 2020,2021, this Note had outstanding principal and interest of approximately $834,000.$898,000. Upon consolidation this Note is eliminated.
U.S. GAAP requires that AMRE entered into a $200,000 unsecured promissory note with LiquidValue Asset Management Pte Ltd (“LVAMPTE”). The Note calls for each business combination, oneinterest to be paid annually on March 2 with interest fixed at 8.0%. See Note 7 for further details. LVAMPTE is majority owned subsidiary of Alset International Limited whose Chief Executive Office and largest shareholder is Heng Fai Ambrose Chan, the Chairman of the combining entities shall be identified asBoard and largest shareholder of the acquirer, andCompany.
On June 18, 2021, DSS Securities, entered into a stock purchase agreement with AMRE to acquire Class A Common Shares of AMRE at a per share price of $, for a total consideration of $2,645,250. The additional Class A Common Shares acquired increases the existence of a controlling financial interest shall be used to identify the acquirer in a business combination. The Company has determined that its aforementioned 52.5%Company’s total equity interest in AAMI provides existenceAMRE to approximately 93%.
On June 18, 2021, AMRE Shelton, LLC., (“AMRE Shelton”) a subsidiary of AMRE financed the purchase of a controlling financial interest40,000 square foot, 2.0 story, Class A+ multi-tenant medical office building located on a 13.62-acre site in Shelton, Connecticut (See Note 7) for the purchase price of $7,150,000. In accordance with Topic 805, the acquisition of the medical facility has been determined to be an acquisition of assets as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. These assets are classified as investments, real estate on the consolidated balance sheet. The purchase price has been allocated as $4,640,000, $1,600,000, and has concluded to account$325,000 for the facility, land and tenant improvements respectively. Also include in the value of the property is $585,000 of intangible assets with an estimated useful life approximating 3 years. All assets were allocated on a relative fair value basis. Contained within the sale-purchase agreement for this transaction in accordance withfacility, is a $1,500,000 earnout due to the acquisition method of accounting under FASB ASC Topic 805, “Business Combinations” (“Topic 805”).seller if certain criteria are met. As of September 30, 2020,2021, no liability has been recorded for this earnout.
During the three- and nine-months ended September 30, 2021, AMRE had incurred $595,000net losses of cost$545,000 and $778,000, respectively, of which $307,000$38,000 and $131,000, respectively is attributable to the non-controlling interest.
Impact BioMedical, Inc.
On August 21, 2020, Document Security Systems, Inc. (the “Company”),the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”Impact”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth, Security, Inc. (“DSS BioHealth”), and related parties Alset International Limited (“Alset Intl”, formallyIntl (formally Singapore eDevelopment Limited), and Global Biomedical Pte Ltd. (“GBM”) (See Note 5), which was previously approved by the Company’s shareholders (the “Share Exchange”).Under the terms of the Share Exchange, the Company issued shares of the Company’s common stock, par value $0.02 $per share, nominally valued at $6.48 $per share, and newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), with a stated value of $46,868,000,$46,868,000, or $1,000 per share, for a total consideration valued at $50 million.of $50 million to acquire 100% of the outstanding shares of Impact. The acquisition was done to add assets and a foundation of products with international market opportunities and demand, and which can be structured into long- term scalable, reoccurring license revenue within the DSS BioHealth line of business. Due to several factors, including a discount for illiquidity, the value of the Series A Preferred Stock was discounted from $46,868,000 to $35,187,000, thus reducing the final consideration given to approximately $38,319,000. The Company incurred approximately $295,000 in cost associated with the acquisition of Impact which were recorded as general and administrative expenses. As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary and operating results of the acquisition will beare included in the Company’s financial statements beginning August 21, 2020. TheImpact BioMedical has several subsidiaries that are not wholly owned by Impact and have an ownership percentage ranging from 63.6% to 100%. During the three and nine months ended September 30, 2021, Impact has incurred approximately $657,000 and $1,964,000 respectively of net losses, of which $115,000 and $281,000 respectively of loss incurred is attributable to non-controlling interest. Although Impact historically, and to date has not generated any revenues, the acquisition of Impact meets the definition of a business with inputs, processes and outputs, and therefore, the Company has concluded to account for this transaction in accordance with the acquisition method of accounting under FASB ASC Topic 805, “Business Combinations”805.
American Pacific Bancorp.
On September 9, 2021, the Company finalized a stock purchase agreement (the “SPA”) with American Pacific Bancorp (“APB”), which provided for an investment of $40,000,000 by the Company into APB for an aggregate of shares of the APB’s Class A Common Stock, par value $per share. Subject to the terms and conditions contained in the SPA, the shares issued at a purchase price of $per share. As a result of this transaction, DSS owns approximately 53% of APB, and as a result its operating results will be included in the Company’s financial statements beginning September 9, 2021. The Company incurred approximately $36,000 in cost associated with the acquisition of APB which were recorded as general and administrative expenses. The acquisition of APB meets the definition of a business with inputs, processes and outputs, and therefore, the Company has concluded to account for this transaction in accordance with the acquisition method of accounting under Topic 805”).805. Activity from August 21, 2020September 9, 2021, to September 30, 20202021, was not significant. The next largest shareholder of APB is Alset EHome International, Inc. (“AEI”). AEI’s Chairman and CEO, Heng Fai Chan, and a member of the AEI’s Board of Directors, Wu Wai Leung William, each serve on both the AEI Board and the Board of the Company. The CEO of the Company, Mr. Frank D. Heuszel, also has an approximate 2% equity position of APB.
The following summary, prepared on a proforma basis, combines the consolidated results of operations of the Company with those of Impact BiomedicalAPB as if the acquisition took place on January 1. The pro forma consolidated results include the impact of certain adjustments.
Schedule of Business Acquisition, Pro Forma Information
| 2020 | 2019 | |||||||
| Sales | $ | 11,517,000 | $ | 9,857,000 | ||||
| Net Income | $ | 1,616,059 | $ | (3,223,000 | ) | |||
| Basic earnings per share | $ | 0.48 | $ | (2.55 | ) | |||
| Diluted earnings per share | $ | 0.15 | $ | (0.37 | ) | |||
| 2021 | 2020 | |||||||
| Revenue | $ | 13,280,000 | $ | 10,233,000 | ||||
| Net (loss)/income | $ | (19,215,000 | ) | $ | 1,778,000 | |||
| Basic (loss)/earnings per share | $ | (0.46 | ) | $ | 0.63 | |||
| Diluted (loss)/earnings per share | $ | (0.46 | ) | $ | 0.46 | |||
We are currently in the process of completing the purchase price accounting and related allocations associated with the acquisition of Impact BioMedical. Due to several factors, including a discount for illiquidity, the value of the Series A Preferred Stock was discounted from $46,868,000 to $35,187,000, thus reducing the final consideration given to approximately $38,319,000.APB. The Company is in the process of completing valuations and useful lives for certain Technology and In Process Research & Development assets acquired in the transaction and the purchase price allocation will be completed with finalization of those valuations. We expect the preliminary purchase price accounting to be completed during the three months ending December 31, 2020.2021. For the purposes of these financial statements, $16,945,000 and $20,301,000 of the consideration given is classified as Other Intangible Assets, Net. No amortization was recorded duringpurchase price has been allocated to Goodwill and Non-controlling interest in subsidiary, respectively, on the three months endedconsolidate balance sheet at September 30, 2020.2021. Net assets acquired were approximately $3,400,000 and included approximately $1,250,000 in cash, $1,900,000 in marketable securities, $330,000 in notes receivable and $101,000 of accounts payable and accrued liabilities. APB and the company in which APB owns marketable securities share a common director.
5. 6. Investments
Alset International Limited (formally Singapore eDevelopment Limited)
AsThe Company owns shares or approximately 7% of March 31, 2020, the Company owned 83,174,129 ordinaryoutstanding shares of Alset International Limited (“Alset Intl”), formallyformerly named Singapore eDevelopment Limited)Limited (“SED”), a company incorporated in Singapore and publicly listed on the Singapore Exchange Limited at an exercise priceas of SGD$0.04 (US$0.029) per share and warrants to purchase an additional 44,005,182 ordinary shares at an exercise price of SGD$0.04 (US$0.029) per share. On June 25, 2020, the Company exercised those warrants bringing its total ownership to 127,179,311 shares or approximately 10% of the outstanding shares of Alset Intl at September 30, 2021, and December 31, 2020. As of June 30, 2020 the Company carried its investment in Alset Intl at cost, less impairments under ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. During the third quarter 2020, the Company determined that the investments has a readily determinable fair value based on the volume of shares traded on the Singapore Exchange which evidences a ready market for shares, as well as a consistent and observable market price. Accordingly, thisThis investment is now classified as a marketable security and is classified as long-term assets on the consolidated balance sheets as the Company has the intent and ability to hold the investments for a period of at least one year. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income (expense). At the time of change the Company recorded an unrealized gain of approximately $2.1 million. The Chairman of the Company, Mr. Heng Fai Ambrose Chan, is the Executive Director and Chief Executive Officer of Alset Intl. Mr. Chan is also the majority shareshareholder of Alset Intl as well as the largest shareholder of the Company. The fair value of the marketable security as of September 30, 2021, and December 31, 2020, was approximately $5,583,000.$5,990,000 and $6,830,000 respectively. During the three months ended September 30, 2021, the Company recorded unrealized gain on this investment of approximately $127,000, and during the nine months ended September 30, 2021, the Company recorded an unrealized loss of approximately $839,000.
Sharing Services Global Corp. (“SHRG”)
As of Juneand through September 30, 2020, the Company had acquired and owned approximately 17% of the issued and outstanding shares ofclassified its investment in Sharing Services Global Corp. (“SHRG”), a publicly traded company, as marketable equity security investment.and measured it at fair value with gains and losses recognized in other income. In the 3rd quarter of 2020, the Company, through a series of class A common shares acquisitions in July 2020, with suchthrough continued acquisition historyof common stock, as detailed below, the Company acquired in aggregate, an ownership interest in SHRG ofobtained greater than 20%. At that time, it was determined that the Company had20% ownership of SHRG, and thus has the ability to exercise significant influence over SHRG. Accordingly, on July 22nd, theit. The Company began prospectively utilizingcurrently accounts for its investment in SHRG using the equity method of accounting for its investment into SHRG in accordance with ASC Topic 323, Investments—Equity Method and will recognizeJoint Ventures recognizing our share of theirSHRG’s earnings and losses within our consolidated statement of operations and comprehensive income (loss). Due to a lag in financial reporting of SHRG, the Company has not recorded any share of earnings or losses during the period ended September 30, 2020. On a go forward basis, earnings or losses from SHRG will be recorded on a two-month lag. As of July 22, 2020, the Company owned 62,417,593 class A common shares of SHRG with an adjusted basis of $11.3 million. As of September 30, 2020, the Company held 62,457,378 class A common shares equating to a 32.2% ownership interest in SHRG and had recorded unrealized gains on marketable securities of approximately $6.1 million for the nine months then ended. As of July 22, 2020, the carrying value of the Company’s equity method investment exceeded our share of the book value of the investee’s underlying net assets by approximately $9.5 million, which represents primarily intangible assets and goodwill arising from acquisitions. The Company is still in the process of valuing the intangible assets at September 30, 2020 and no amortization has been recorded during the period ended September 30, 2020. The following table represents SHRG operating results for the three months ended July 31, 2020: operations.
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| Net sales | $ | 21,899,160 | ||
| Gross profit | $ | 16,000,134 | ||
| Operating loss | $ | (1,146,919 | ) | |
| Loss before income taxes | $ | (1,234,868 | ) | |
| Income taxes | $ | (141,491 | ) | |
| Net loss | $ | (1,093,377 | ) |
On July 21st and 22nd, 2020, the Company purchased an aggregate of 11,000,000 shares of Class A common Stock of Sharing Services Global Corp. (SHRG) in two private purchases from third parties at a purchase price of for $0.08 per share or $880,000. At that time the Chief Executive Officer of SHRG, Mr. John “JT” Thatch, served as a director on the Company’s board of directors and the Chairman of the board of directors of the Company, Mr. Fai Heng Chan, served on the board of directors of SHRG.
On July 22, 2020, Chan Heng Fai Ambrose, the Chairman of the Company’s board of directors, assigned a Stock Purchase and Share Subscription Agreement by and between Mr. Chan and SHRG, pursuant to which the Company purchased shares of Class A Common Stockcommon stock and 10,000,000 warrants to purchase Class A Common Stockcommon stock for $3 million.$3 million, causing the Company’s ownership in SHRG to exceed 20%. The warrants have an average exercise price of $0.20,$0.20, immediately vested and may be exercised at any time commencing on the date of issuance and ending three yearyears from such date. These shares andThe warrants are also subjectconsidered an equity investment that is recorded at fair value with gains and losses recorded through earnings. These warrants have been recorded at the fair value of $324,000 as of September 30, 2021, as compared to a one-year trading restriction pursuant to$1,056,000 at December 31, 2020 on the termsCompany’s consolidated balance sheet and are included in “other investments” with the decrease representing an unrealized loss of a Lock-Up Agreement entered into between Mr. Chan $224,000 and $732,000 respectively during the Companythree and assigned tonine months ended September 30, 2021.
As of July 22, 2020, the Company.
The Company had acquired in a series of open-market transactions, between March 2020 and September 2020 an aggregate of 13,957,378 of additional common shares, at an average purchase price of $0.06 per share. The Company, during this same period, had also purchased 18,500,000 shares of SHRG in private purchases at an average purchase price of $0.08 per share.
As noted above, DSS, via four (4)carrying value of the Company’s existing board members, currently holds four (4)equity method investment exceeded our share of the five (5) SHRG boardbook value of director seats. Mr. JT Thatch, DSS’s Lead Independent Directorthe investee’s underlying net assets by approximately $9,192,000 which represents primarily intangible assets in the form of a distributor lists and as wellgoodwill arising from acquisitions. These intangible assets have been valued at approximately $1,148,000 and $8,044,000, respectively. The intangible asset arising from the CEOdistributor list has a five-year useful life. The Company has recorded amortization of SHRG is$57,000 and $287,000 for the three- and nine-months ended September 30, 2021, respectively, on the SHRG Board, along with Mr. Fai Heng Chan, DSS’s Executive Chairmanconsolidated statement of the board of directors (joined the SHRG Board effective May 4, 2020), Mr. Sassuan “Sam” Lee, DSS Independent Director (joined the SHRG Board effective September 29, 2020) and Mr. Frank D. Heuszel, the CEOoperations. On April 5, 2021, a subsidiary of the Company (joinedentered into a convertible promissory note (“SHRG Note”) with SHRG (see Note 3). The Company loaned the principal sum of $30,000,000. Accordingly, in April 2021, the SHRG Boardissued to the Company shares of its Class A Common Stock, including shares in payment of the loan origination fee and shares in prepayment of interest for the first year. In addition, the Company received 150,000,000 warrants both issued and vested on April 5, 2021. These warrants have an exercise price of $0.22 and expire April 5, 2026. As of the date of issuance the warrants the consideration paid allocated to the warrants amounted to approximately $14,957,000. The warrants are considered an equity investment that is recorded at fair value with gains and losses recorded through earnings. These warrants have been recorded at the fair value of $6,212,000 as of September 30, 2021, on the Company’s consolidated balance sheet and are included in “other investments” with the decrease representing an unrealized loss of $2,780,000 and $8,745,000, respectively, during the three- and nine-months ended September 30, 2021. As of September 30, 2021, the Company held class A common shares equating to a 46.8% ownership interest in SHRG. SHRG change its fiscal year end from April 30 to March 31, and due to this change and the difference in fiscal year ends between the two companies, effective for the three- and nine-month ended September 29, 2020)30, 2021, DSS changed its previous election to recognized its portion of SHRG’s earnings and losses on a two-month lag as of June 30, 2021 and has elected to recognize its portion of SHRG’s earnings and losses on a three-month lag basis going forward and utilized SHRG’s three-month ended June 30, 2021, reported results to recognize a loss on the equity method investment of approximately $1,645,000. This change represents a change in accounting principle under ASC 250 “Accounting Changes and Error Corrections”. The aggregate fair value of the Company’s investment in SHRG at September 30, 2021 was approximately $8,688,000.
The following table represents SHRG operating results for the three-months ended June 30, 2021:
Schedule of Operating Result
| Net sales | $ | 11,211,526 | ||
| Gross profit | $ | 7,857,716 | ||
| Operating loss | $ | (2,021,069 | ) | |
| Loss before income taxes | $ | (2,800,118 | ) | |
| Income tax benefit | $ | 747,889 | ||
| Net loss | $ | (3,548,007 | ) |
BMI Capital International LLC
On September 10, 2020, the Company’s wholly owned subsidiary DSS Securities, Inc. entered into membership interest purchase agreement with BMI Financial Group, Inc. a Delaware corporation (“BMIF”) and BMI Capital International LLC, a Texas limited liability company (“BMIC”) whereas DSS Securities, Inc. purchased 14.9%14.9% membership interests in BMIC for $100,000.$100,000. DSS Securities also hashad the option to purchase an additional 10%10% of the outstanding membership interest. This option expires oninterest which it exercised in January of 2021 and increased its ownership to 24.9%. Upon achieving greater than 20% ownership in BMIC during the quarter ended March 31, 2021, and September 10, 2022.30, 2021, the Company is currently accounting for this investment under the equity method of accounting per ASC 323. The Company’s portion of net income in BMIC during the three and nine months ended September 30, 2021, was not significant.
BMIC is a broker-dealer registered with the Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”), and is a member of the Securities Investor Protection Corporation (“SIPC”). The Company’s chairman of the board and another independent board member of the Company also have ownership interest in this joint venture.
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Alset Title Company
On or about August 28, 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”). DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process. ATC have initiated or have pending applications to do business in a number of states, including Texas, Tennessee, Connecticut, Florida, and Illinois. For the purpose of organization and the state application process, the Company’s CEO, who is a licensed attorney, has a stated non-compensated 15% ownership interest in the venture. There was nominimal activity for the three and nine months ended September 30, 2020.2021.
BioMed Technologies Asia Pacific Holdings Limited
On December 19, 2020, Impact BioMedical, a wholly-owned subsidiary of the Company, entered into a subscription agreement (the “Subscription Agreement”) with BioMed Technologies Asia Pacific Holdings Limited (“BioMed”), a limited liability company incorporated in the British Virgin Islands, pursuant to which the Company agreed to purchase ordinary shares or 4.99% of BioMed at a purchase price of approximately $630,000. The Subscription Agreement provides, among other things, the Company has the right to appoint a new director to the board of BioMed. With respect to an issuance of shares to a third party by BioMed, the Company will have the right of first refusal to purchase such shares, as well as customary tag-along rights. In connection with the Subscription Agreement, Impact entered into an exclusive distribution agreement (the “Distribution Agreement”) with BioMed, to directly market, advertise, promote, distribute, and sell certain BioMed products, which focus on manufacturing natural probiotics, to resellers. This investment is valued at cost as it does not have a readily determined fair value.
BioMed focuses on manufacturing natural probiotics, pursuant to which the Company will directly market, advertise, promote, distribute and sell certain BioMed products to resellers. The products to be distributed by the Company include BioMed’s PGut Premium Probiotics®, PGut Allergy Probiotics®, PGut SupremeSlim Probiotics®, PGut Kids Probiotics®, and PGut Baby Probiotics®.
Under the terms of the Distribution Agreement, the Company will have exclusive rights to distribute the products within the United States, Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries. In exchange, the Company agreed to certain obligations, including mutual marketing obligations to promote sales of the products. This agreement is for ten years with an one year auto-renewal feature.
Vivacitas Oncology, Inc.
On March 15, 2021, the Company, through one of its subsidiaries, entered into a Stock Purchase Agreement (the “Vivacitas Agreement #1”) with Vivacitas Oncology Inc. (“Vivacitas”), to purchase shares of its common stock at the per share price of $, with an option to purchase additional shares at the per share price of $1.00. This option will terminate upon one of the following events: (i) Vivacitas’ board of directors cancels this option because it is no longer in the best interest of the Company; (ii) December 31, 2021; or (iii) the date on which Vivacitas receives more than $1.00 per share of the Company’s common stock in a private placement with gross proceeds of $500,000. Under the terms of the Vivacitas Agreement #1, the Company will be allocated two seats on the board of Vivacitas. On March 18, 2021, the Company entered into an agreement with Alset EHome International, Inc. (“Seller”) to purchase from the Seller’s its wholly owned subsidiary Impact Oncology PTE Ltd. (“IOPL”) for a purchase price $2,480,000. The acquisition of IOPL has been treated as an asset acquisition as IOPL does not meet the definition of a business as defined in Topic 805. IOPL owns shares of common stock of Vivacitas along with the option to purchase an additional shares of common stock. The Sellers largest shareholder is Mr. Chan Heng Fai Ambrose, the Chairman of the Company’s board of directors and its largest shareholder.
On April 1, 2021, the Company entered into an additional stock purchase agreement with Vivacitas (“Vivacitas Agreement #2”), whereas Vivacities wished to employ the service of the Chief Business Officer of Impact Biomedical, and in return for the services of this individual, Vivacitas shall issue to the Company, the aggregate purchase price for the Class A Common Shares of Vivacitas at the value of $ per share shall be $120,000 to be paid in twelve (12) equal monthly installments for the period between April 1, 2021 and March 31, 2022. As of September 30, 2021, the Company has received 60 Common A Shares of Vivacitas.
On July 22, 2021, the Company exercised of the available options under the Vivacitas Agreement #1 for $1,000,000. This, along with the shares received as part Vivacitas Agreement #2 increased the Company’s equity position in Vivacitas to approximately 19% as of September 30, 2021.
Sentinel Brokers Company, Inc.
On May 13, 2021, a Sentinel Brokers, LLC., subsidiary of the Company entered into a stock purchase agreement (“Sentinel Agreement”) to acquire a 24.9% equity position of Sentinel Brokers Company, Inc. (“Sentinel”), a company registered in the state of New York, for the purchase price of $300,000. During the three months ended September 30, 2021, the Company contributed and additional $750,000 capital into Sentinel, increasing its total capital investment to $1,050,000 as of September 30, 2021. Under the terms of this agreement, the Company as the option to purchase an additional 50.1% of the outstanding Class A Common Shares. Upon the exercising of this option, but no earlier than one year following the effective date the Sentinel Agreement, Sentinel has the option to sell the remaining 25% to the Company. In consideration of purchase price investment in Sentinel, the Company is entitled to an additional 50.1% of the net profits of Sentinel. The Company currently accounts for its investment in Sentinel using the equity method in accordance with ASC Topic 323, as it currently owns 24.9% of Sentinel. The Company currently accounts for its investment in Sentinel using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures recognizing our share of Sentinel’s earnings and losses within our consolidated statement of operations. The Company recognized a gain on the equity method investment of approximately $11,000 for the three-months ended September 30, 2021, and a loss of $6,000 on the equity investment for the nine-months ended September 30, 2021.
Sentinel is a broker-dealer operating primarily as a fiduciary intermediary, facilitating intuitional trading of municipal and corporate bonds as well as preferred stock, and is registered with the Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”), and is a member of the Securities Investor Protection Corporation (“SIPC”).
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6. 7. Short-Term and Long-Term Debt
Revolving Credit Lines - The Company’s subsidiary Premier Packaging Corporation (“Premier Packaging”) has a revolving credit line with Citizens Bank (“Citizens”) of up to $800,000$800,000 that bears interest at 1 Month LIBOR plus 2.0% (2.1% as of September 30, 2020)2.0%. This revolving line of credit was renewed and has a maturity date of May 31, 2021 and is renewable annually. This renewal was not exercised by Premier Packaging. As of September 30,December 31, 2020, the revolving line had a balance of $0.$0.
On July 26, 2017, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens pursuant to which Citizens agreed to lend up to $1,200,000$1,200,000 to permit Premier Packaging to purchase equipment from time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit shall bear interest thereon at a per annum rate of 2%2% above the LIBOR Advantage Rate until the Conversion Date (as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to a fixed rate equal to 2% above the bank’s Cost of Funds, as determined by Citizens. Current maturities of long-term debt are based on an estimated 48-month amortization which will be adjusted upon conversion. As of September 30,December 31, 2020, the Term Note had a balance of $801,000.$771,000. The Company pays a monthly amount of $13,000 in principal and interest.
On December 1, 2017, the Company’s subsidiary Plastic Printing Professionals entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens which was converted into two term notes under which the Company will make monthly payments of $14,000 until November 30, 2023. Interest under the term notes is payable monthly at 5.37%. Onpaid in full in July 20, 2020 the Company paid of this note.2021.
Equipment Line of Credit - On July 31, 2020, Premier Packaging entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement with Citizens pursuant to which Citizens agreed to lend up to $900,000$900,000 to permit Premier Packaging to purchase equipment from time to time that it may need for use in its business. The aggregate principal balance outstanding under the Equipment Acquisition Line of Credit shall bear interest thereon at a per annum rate of 2%2% above the LIBOR Advantage Rate until the Conversion Date (as defined in the Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest shall be adjusted to a fixed rate equal to 2%2% above the bank’s Cost of Funds, as determined by Citizens. With a maturity date of July 28, 2021, this equipment line is renewable annually. As of September 30,December 31, 2020, the loan had a balance of $0 and$0. Premier Packaging still has available $900,000 for equipment borrowings.did not exercise its right to renew this line of credit.
Promissory Notes - On June 27, 2019, Premier Packaging refinanced and consolidated the outstanding principal associated with the two promissory notes for its packaging plant located in Victor, New York, for $1,200,000$1,200,000 with Citizens Bank. The new Promissory Note calls for monthly payments of $7,000,$7,000, with interest fixed at 4.22%4.22%. The new Promissory Note matures on June 27, 2029, at which time a balloon payment of $708,000$708,000 is due. As of September 30,December 31, 2020, the new, consolidated Promissory Note had a balance of $1,110,000.$ $1,100,000. In July of 2021, Premier Packaging repaid this note in full.
The Citizens credit facilities to each of the Company’s subsidiaries, Premier Packaging, contain various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants which are tested annually at December 31. For the year ended December 31, 2019,2020, Premier Packaging was in compliance with the annual covenants.
On October 24, 2018, the Company’s subsidiary, DSS Asia Limited entered into a $100,000 unsecured promissory note with HotApps International Pte Ltd in conjunction with the acquisition of Guangzhou HotApps Technology Ltd., a Chinese subsidiary of HotApps International Pte Ltd, by DSS Asia Limited. The promissory note does not accrue interest and had a maturity date of October 24, 2020. This note was paid in full on October 9, 2020.
On March 2, 2020, AMRE entered into a $200,000 $200,000 unsecured promissory note with LVAM.LVAMPTE. The Note calls for interest to be paid annually on March 2 with interest fixed at 8.0%8.0%. As of December 31, 2020, accrued interest is included in the outstanding balance. If not paid sooner, the entire unpaid principal balance is due in full on March 2, 2022.2022. As further incentive to enter into this Note, AMRE granted LVAMLVAMPTE warrants to purchase shares of common stock of AMRE (the “Warrants”). The amount of the warrants granted is the equivalent of the Note Principal divided by the Exercise Price. The Warrants are exercisable for four years and are exercisable at $5.00 $5.00 per share (the “Exercise” Price). The value of the warrants is not considered to be material. The holder is a related party owned by the Chairman of the Company’s board of directors. As of September 30, 2021, the new promissory note, inclusive of unpaid interest, had a balance of $226,000.
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During Q2 2020, the Company received loan proceeds for Premier Packaging, DSS Digital, and AAMI in the amount of approximately $1,072,000$1,078,000 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. These funds were used for payroll, benefits, rent, mortgage interest, and utilities. As of August 4, 2020, pursuant to the terms of the SBA PPP program, the Company submitted applications for Premier Packaging and DSS Digital for a requested 100%100% loan forgiveness. During the fourth quarter 2020, both these notes approximating $969,000 were forgiven in full and recognized as a gain on the extinguishment of debt on the accompanying consolidated financial statements as of December 31, 2020. AAMI, pursuant to the terms of the SBA PPP program, submitted its application for 100%100% loan forgiveness in October 2020. Those applications are currently pending. Based2020, and received confirmation of forgiveness in January 2021.
On March 16, 2021, American Medical REIT, Inc. received loan proceeds in the amount of approximately $110,000 under the Paycheck Protection Program (“PPP”) with a fixed rate of 1% and a 60-month maturity term. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. These funds were used for payroll, benefits, rent, mortgage interest, and utilities.
On May 20, 2021, Premier Packaging entered into master loan and security agreement (“BOA Note”) with Bank of America, N.A. (“BOA”) to secure financing in an amount not to exceed $3,200,000 to purchase a new Heidelberg XL 106-7+L printing press. The aggregate principal balance outstanding under the BOA Note shall bear interest at a variable rate on or before the loan closing. At closing, the interest rate shall be fixed for the duration of the Loan. As of September 30, 2021, the outstanding principal on the uncertainty surroundingBOA Note was $1,855,000 and had an interest rate of 2.42%.
On June 18, 2021, AMRE Shelton, LLC., (“AMRE Shelton”) a subsidiary of AMRE, entered into a loan agreement (“Shelton Agreement”) with Patriot Bank, N.A. (“Patriot Bank”) in an amount up to $6,155,000, with the forgiveness,amount financed approximating $5,105,000. The Shelton Agreement contains monthly payments of principal and an initial interest 4.25%. The interest will be adjusted commencing on July 1, 2026 and continuing for the amountsnext succeeding 5 year period shall be determined one month prior to the change date and shall be an interest rate equal to two hundred fifty (250) basis points above the Federal Home Loan Bank Boston 5-Year/25-Year amortizing advance rate, but in no event less than 4.25% for the term of 120 months with a balloon payment approximating $2,829,000 due at term end. This agreement contains certain covenants that are analyzed on an annual basis, starting December 31, 2021. The funds borrowed were used to purchase a 40,000 square foot, 2.0 story, Class A+ multi-tenant medical office building located on a 13.62 acre site (See Note 5). Of the total financed, approximately $191,000 is classified as current portion of long-term debt, net, and the remaining balance of approximately $4,699,000 recorded as long-term debt, on the accompanying consolidated balance sheets at September 30, 2020. If not forgiven, these loans calculate interest at 1% and have a two-year repayment period.net of $185,000 in deferred financing costs.
78. Lease Liability
The Company has operating leases predominantly for operating facilities. As of September 30, 2020, 2021, the remaining lease terms on our operating leases range from less than one to two years. DSS Plastics Group which finalized the sale of its assets on August 14, 2020 is not included in the lease liability calculation (see Note 10)five years. Renewal options to extend our leases have not been exercised due to uncertainty. Termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants. There are no significant finance leases as of September 30, 2020.2021.
Future minimum lease payments as of September 30, 20202021, are as follows:
| Maturity of Lease Liability | ||||
| Totals | ||||
| 2020 | $ | 11,000 | ||
| 2021 | 6,000 | |||
| 2022 | 1,000 | |||
| 2023 | - | |||
| 2024 | - | |||
| Total lease payments | 18,000 | |||
| Less: Imputed Interest | (1,000 | ) | ||
| Total lease liability | $ | 17,000 | ||
| Current | $ | 13,000 | ||
| Noncurrent | $ | 4,000 | ||
| Weighted-average remaining lease term (years) | 0.8 | |||
| Weighted-average discount rate | 5.4 | % | ||
Maturity of Lease Liability
Schedule of Future Minimum Lease Payments
| Totals | ||||
| 2021 | $ | 59,000 | ||
| 2022 | 88,000 | |||
| 2023 | 50,000 | |||
| 2024 | 4,000 | |||
| 2025 | 4,000 | |||
| 2026 | 2,000 | |||
| Total lease payments | 207,000 | |||
| Less: Imputed Interest | (10,000 | ) | ||
| Present value of remaining lease payments | $ | 197,000 | ||
| Current | $ | 122,000 | ||
| Noncurrent | $ | 75,000 | ||
| Weighted-average remaining lease term (years) | 0.85 | |||
| Weighted-average discount rate | 5.4 | % | ||
8. 9. Commitments and Contingencies
The Apple Litigation
On November 26, 2013, DSSTMDSS Technology Management, Inc. (“DSSTM”) filed suit against Apple, Inc. (“Apple”) in the United States District Court for the Eastern District of Texas, for patent infringement (the “Apple Litigation”). The complaint alleges infringement by Apple of DSSTM’s patents that relate to systems and methods of using low power wireless peripheral devices. DSSTM is seeking a judgment for infringement, injunctive relief, and compensatory damages from Apple. On October 28, 2014, the case was stayed by the District Court pending a determination of Apple’s motion to transfer the case to the Northern District of California. On November 7, 2014, Apple’s motion to transfer the case to the Northern District of California was granted. On December 30, 2014, Apple filed two Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board (“PTAB”) for review of the patents at issue in the case. The PTAB instituted the IPRs on June 25, 2015. The California District Court then stayed the case pending the outcome of those IPR proceedings. Oral arguments of the IPRs took place on March 15, 2016, and on June 17, 2016, PTAB ruled in favor of Apple on both IPR petitions. DSSTM then filed an appeal with the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) seeking reversal of the PTAB decisions. Oral arguments for the appeal were held on August 9, 2017. On March 23, 2018, the Federal Circuit reversed the PTAB, finding that the PTAB erred when it found the claims of U.S. Patent No. 6,128,290 to be unpatentable. The Federal Circuit affirmed its decision on July 12, 2018, when it denied Apple’s petition for panel rehearing of the Federal Circuit’s Opinion and Judgment issued on March 23, 2018. On July 27, 2018, the District Court judge lifted the Stay resuming the litigation, which had a trial date set for the week of February 24, 2020. On January 14, 2020, the Court in the case DSS Technology Management, Inc. v. Apple, Inc., 4:14-cv-05330-HSG pending in the Northern District of California issued an order that denied DSS’ motion to amend its infringement contentions. In the same Order, the Court granted Apple’s motion to strike DSS’ infringement expert report. DSS filed a motion for leave to file a motion for reconsideration of the Court’s order denying DSS the right to amend its infringement contentions and motion to strike DSS infringement expert report. On February 18, 2020, the Court denied DSS’s motion for leave to file a motion for reconsideration. On February 24, 2020, the Court signed a Final Judgment stipulating that Apple was “entitled to a judgment of non-infringement of U.S. Patent No. 6,128,290 as a matter of law.” On March 10, 2020, DSS filed an appeal of this Final Judgment to the United States Court of Appeals for the Federal Circuit under DSS Technology Management v. Apple, Federal Circuit Docket no. 2020-1570. DSSTM has filed its Plaintiff-Appellate brief and Apple has filed its responsive brief. DSSTM’s reply brief is due by November 16, 2020.
The LED Litigation
On April 13, 2017,27, 2021, the Company filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor, Inc. (collectively, “Seoul Semiconductor”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s Light-Emitting Diode (“LED”) patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On June 7, 2017, the Company refiled its patent infringement complaint against Seoul Semiconductor in the United States District Court for the Central District of California, Southern Division. On December 3, 2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 6,949,771. This IPR was instituted by the PTAB on June 7, 2018. On April 18, 2019, the PTAB issued a written decision determining claims 1-9 of the ‘771 patent unpatentable. The Company did not appeal that determination. On December 21, 2017, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 7,256,486. This IPR was instituted by the PTAB on June 21, 2018. On June 10, 2019, the PTAB issued a written decision determining claims 1-3 of the ‘486 patent unpatentable. On August 12, 2019, the Company filed a Notice of Appeal with the Federal Circuit Court of Appeals challengingheard oral argument, and on April 30, 2021, the PTAB’s decisions. The Company subsequently filed a motion to vacate and remandCourt affirmed the PTAB’s decision in light of intervening precedent under the Appointments Clause. That motion was granted on January 23, 2020. On January 25, 2018, Seoul Semiconductor filed an IPR challenging the validity of certain claims of U.S. Patent No. 7,524,087. This IPR was instituted by the PTAB on July 27, 2018. On July 22, 2019, the PTAB issued a written decision determining claims 1, 6-8, 15, and 17 of the ‘087 patent unpatentable. On September 23, 2019,District Court’s judgment. After considering all factors the Company filed a Notice of Appeal with the Federal Circuit Court of Appeals challenging the PTAB’s decisions. The Company subsequently filed a motionhas elected to vacate and remand the PTAB’s decision in light of intervening precedent under the Appointments Clause. That motion was granted on February 3, 2020. These challenged patents are the patents that are the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR proceedings.
On April 13, 2017, the Company filed a patent infringement lawsuit against Cree, Inc. (“Cree”) in the United States District Court for the Eastern District of Texas, alleging infringement of certain of the Company’s LED patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On June 8, 2017, the Company refiled its patent infringement complaint against Cree in the United States District Court for the Central District of California, and thereafter filed a first amended complaint for patent infringement against Cree in that same court on July 14, 2017. The case is currently pending as of the date of this Report. On June 6, 2018, Cree filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,256,486. This IPR was instituted and joined with the Seoul Semiconductor IPR. On June 7, 2018, Cree filed IPR petitions challenging the validity of certain claims U.S. Patent Nos. 7,524,087 and 6,949,771. Both IPRs were denied by the PTAB on November 14, 2018 as time barred. The challenged patent is the patent that is the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR.
On August 15, 2017, the Company filed a patent infringement lawsuit against Lite-On, Inc., and Lite-On Technology Corporation (collectively, “Lite-On”) in the United States District Court for the Central District of California, alleging infringement of certain of the Company’s LED patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently pending but is stayed pending the outcome of IPR proceedings filed by other parties.
On December 7, 2017, DSS filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United States District Court for the Central District of California, alleging infringement of certain of DSS’s LED patents. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The case is currently pending as of the date of this Report. On May 10, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,919,787. On May 11, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,652,297. On May 25, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,524,087. On May 29, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 6,949,771. On May 30, 2018, Nichia filed an IPR petition challenging the validity of claims under U.S. Patent No. 7,256,486. The 6,949,771 IPR was denied institution, but the remaining IPRs were instituted by the PTAB. On December 10, 2018, Nichia refiled IPRs relating to 6,949,771, which was denied by the PTAB on April 15, 2019. These challenged patents are the patents that are the subject matter of the infringement lawsuit, which is pending but stayed pending the outcome of the IPR proceedings. On September 17, 2019, the PTAB issued a written decision determining claims 1-14 of the ‘787 patent unpatentable. The Company did not appeal that determination. On October 30, 2019, the PTAB issued a written decision determining claims 1-17 of the ‘297 patent unpatentable. The Company did not appeal that determination. On November 19, 2019, the PTAB issued a written decision determining claims 1-5 of the ‘486 patent unpatentable. The Company has appealed that determination to the U.S. Court of Appeals for the Federal Circuit. The Company’s opening briefpursue any further appeals on this appealmatter. Case is currently due September 10, 2020.deemed closed.
On September 18, 2019, DSS filed a patent infringement lawsuit against Seoul Semiconductor Co., Ltd. and Seoul Semiconductor Inc. in the United States District Court for the Central District of California alleging infringement of U.S. Patent No. 7,315,119. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling conference and has set a procedural schedule for the case. On May 18, 2020, Seoul Semiconductor filed an IPR petition challenging the validity of claims 1-7 of the patent. The District Court has entered a stay of the District Court proceedings pending the outcome of the IPR petition.
On September 19, 2019, DSS filed a patent infringement lawsuit against Cree, Inc. in the United States District Court for the Central District of California alleging infringement of U.S. Patent No. 6,784,460. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. On February 11, 2020, Cree filed an IPR petition challenging the validity of the patent claims. The Court has conducted an initial scheduling conference and has set a procedural schedule for the case. The District Court has entered a stay of the District Court proceedings pending the outcome of the IPR petition.
On September 20, 2019, DSS filed a patent infringement lawsuit against Nichia Corp. and Nichia America Corp. in the United States District Court for the Central District of California alleging infringement of U.S. Patent No. 6,879,040. The Company is seeking a judgment for infringement of the patents along with other relief including, but not limited to, money damages, costs and disbursements. The Court has conducted an initial scheduling conference and has set a procedural schedule for the case. On May 18, 2020, Nichia filed an IPR petition challenging the validity of claims 1-4, 8, and 11 of the patents. The District Court has entered a stay of the District Court proceedings pending the outcome of the IPR petition.
The Intel, Apple Litigation
On November 20, 2019, DSS Technology Management was sued in the United States District Court, Northern District of California, by Intel Corporation (“Intel”) and Apple Inc. (“Apple”). The other defendants in the litigation are Fortress Investment Group LLC, Fortress Credit Co. LLC, Uniloc 2017 LLC, Uniloc USA, INC., Uniloc Luxembourg S.A.R.L., VLSI Technology LLC, INVT SPE LLC, Inventergy Global, INC., IXI IP, LLC, and Seven Networks, LLC. The complaint includes allegations regarding a February 13, 2014 Investment Agreement between DSS Technology Management and Fortress Credit Co. LLC as well as two subsequent agreements. The complaint also contains allegations regarding DSS Technology Management’s lawsuit against Intel that was filed in February 2015 in the United States District Court, Eastern District of Texas (referred to below). In the complaint, Intel and Apple allege violations of Section 1 of the Sherman Act and unfair competition under Cal. Bus. & Prof. Code § 17200 against DSS Technology Management. Additional claims are alleged against other defendants. Intel and Apple seek relief from the court including that defendants’ conduct be declared a violation of Section 1 of the Sherman Act, Section 7 of the Clayton Act, and Cal. Bus. & Prof. Code § 17200, et seq.; that Intel and Apple recover damages against defendants in an amount to be determined and multiplied to the extent provided by law, including under Section 4 of the Clayton Act; that all contracts or agreements defendants entered into in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared void and the patents covered by those transfer agreements be transferred back to the transferors; that all patents transferred to defendants in violation of the Sherman Act, Clayton Act, or Cal. Bus. & Prof. Code § 17200, et seq. be declared unenforceable; and that Intel and Apple recover their costs and expenses associated with this case, together with interest. DSS Technology Management responded to the complaint on February 4, 2020 by filing a motion to dismiss and strike the complaint as well as a motion to stay discovery. The court granted the motion to stay discovery on March 25, 2020. A hearing on the motion to dismiss and to strike the complaint was reset for July 8, 2020. On July 8, 2020 the court granted DSS’s motion to dismiss, and while the order allowed the Plaintiffs leave to amend their complaint, it did dismiss with prejudice claims against DSS based on the patents asserted by DSS that were part of the complaint. On August 4, 2020, Apple and Intel filed a first amended complaint, in which DSS is no longer named as a defendant and upon which we believe the case is closed as to DSS.
The Ronaldi Litigation
In April 2019 DSS commenced an action in New York State Supreme Court, Monroe County, Index No. E2019003542, against Jeffrey Ronaldi, our former Chief Executive Officer. This New York action seeks a declaratory judgment that, contrary to informal claims made by him, Mr. Ronaldi’s employment agreement with us expired by its terms and that he is not entitled to any cash bonuses or other unpaid amounts. The lawsuit also seeks an injunction against Mr. Ronaldi from interfering with any of DSS’ IP litigation. Mr. Ronaldi subsequently commenced an action against DSS in the Superior Court of California, County of San Diego, on November 8, 2019, under case number 37-2019-00059664-CU-CO-CTL, in which he alleged that DSS terminated his employment in April 2019 in order to avoid paying him certain employment-related amounts. DSS was successful in dismissing the California case and consolidating it with the action pending in Monroe County, New York. Mr. Ronaldi asserted counterclaims in the Monroe County, New York action similar to those he originally brought in California. Mr. Ronaldi claims that his termination violated an alleged employment agreement or implied-in-fact employment agreement and that he should have remained employed through 2019. Mr. Ronaldi seeks to recover: (i) $144,657.53$144,658 in wages from April 11, 2019 through December 31, 2019; (ii) $769.23$769 in alleged unpaid based salary for time worked before April 11, 2019; (iii) $15,384.62$15,385 in alleged paid time off compensation; (iv) $3,076.93$3,077 in alleged unpaid sick time compensation; (v) $26,076.93$26,077 in waiting-time penalties; (vi) -$91,000$91,000 in unspecified expense reimbursement; (vii) $300,000 in alleged cash bonuses ($100,000 per year) based on DSS’s performance in 2017, 2018 and 2019; and (viii) a $450,000 performance bonus based on the result of certain alleged net proceeds from patent infringement litigation. He further claims an interest in any recovery in DSS Technology Management v. Apple, Inc., Case No. 4:14-cf-05330-HSG.14-cf05330-HSG. The parties are now engaged in discovery. The current deadline for completion of fact discovery is March 12, 2021, and a Note of Issue signaling readiness for trial is due May 28, 2021..
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Additionally, on March 2, 2020, DSS and DSSTM filed a second litigation action against Jeffrey Ronaldi in the State of New York, Supreme Court, County of Monroe, Document Security Systems, Inc. and DSS Technology Management, Inc. vs. Jeffrey Ronaldi, Index No.: 2020002300, alleging acts of self-dealing and conflicts of interest while he served as CEO of both DSS and DSS TM. Mr. Ronaldi filed a Notice of Removal of this civil litigation to the United States District Court for the Western District of New York where it was assigned Case No. 6:20-cv-06265-EAW. Mr. Ronaldi filed a motion seeking to compel DSS to advance his legal fees to defend the action, which motion was fully briefed as of June 30, 2020, and remains pending and undecided. On March 16, 2021, the Western District of New York granted Mr. Ronaldi’s motion to have his defense costs advanced to him during the pendency of the action as they are incurred. On March 26, 2021, Mr. Ronaldi applied to the court for reimbursement of $160,896 in legal fees. The Company has objected to the size of that bill as it was based on out-of-town billing rates and the result of an excessive number of hours spent on litigation. The parties arenow engaged in discovery, awaiting a decision on the court’s schedulingCompany’s objection to Mr. Ronaldi’s fee application. The parties engaged in court-ordered mediation on June 17, 2021, but the matter did not resolve. Following mediation, the Company moved to stay the federal court action pending the outcome of the status conferencestate court action to avoid inconsistent rulings on common issues of law and fact. The motion to stay is pending. The Company intends to vigorously defend its position.
Maiden Biosciences Litigation
On February 15, 2021, Maiden Biosciences, Inc. (“Maiden”) commenced an action against Document Security Stems, Inc. (“DSS”), Decentralized Sharing Systems, Inc. (“Decentralized”), HWH World, Inc. (“HWH”), RBC Life International, Inc., RBC Life Sciences, Inc (“RBC”)., Frank D. Heuszel (“Heuszel”), Steven E. Brown, Clinton Howard, and Andrew Howard (collectively, “Defendants”). The lawsuit is currently pending in the United States District Court Northern District of Texas, Dallas Division, and is styled and numbered Maiden Biosciences, Inc. v. Document Security Stems, Inc., et al., Case No. 3:21-cv-00327.
This lawsuit relates to two promissory notes executed by RBC in the 4th quarter of 2019 in favor of Decentralized and HWH, totaling approximately $800,000. Maiden, a 2020 default judgment creditor of RBC, in the principal amount of $4,329,000, now complains about those notes, the funding of those notes, the subsequent default of those notes by RBC, and HWH and Decentralize’s subsequent Article 9 foreclosure or deed-in-lieu debt conveyances. In the instant lawsuit, Maiden asserts claims against Defendants for unjust enrichment, fraudulent transfer under the managementTexas Uniform Fraudulent Transfer Act, and violation of all pretrial activitiesthe Racketeer Influenced and Corrupt Organizations Act. Maiden also seeks a judgment from the court declaring: “(1) Defendants lacked a valid security interest in RBC and RBC Subsidiaries’ assets and therefore lacked the authority to sell the assets during the public foreclosure sale; (2) Defendant Heuszel’s low bid at the public foreclosure sale was invalid and void; (3) the public foreclosure sale was conducted in a commercially unreasonable manner; and (4) Defendants do not have the legal authority to transfer RBC and RBC’s Subsidiaries assets to Heuszel and HWH.” Maiden seeks to recover from Defendants: (1) treble damages or, alternatively, damages in the amount of their underlying judgment plus the other creditors’ claims or the value of the assets transferred, whichever is less, plus punitive or exemplary damages; (2) pre and post-judgment interest; and (3) attorneys’ fees and cost.
On March 30, 2021, Defendants DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel filed a motion to dismiss seeking to dismiss Maiden’s unjust enrichment, exemplary damages, and RICO claims against DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel, as well as Maiden’s fraudulent transfer claims against DSS and RBC International, Inc. On August 9, 2021, the Court then entered an order granting in part the motion to dismiss filed on behalf of DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel. Among other things, the Court held that Maiden failed to plausibly plead certain causes of action, including (1) the civil RICO claim against DSS, Decentralized, HWH, RBC Life International, Inc., and Heuszel, (2) the TUFTA claim against DSS, and (3) the unjust enrichment claim against DSS and RBC Life International, Inc. Notably, the Court declined the request to dismiss the TUFTA claim against RBC Life International, Inc. The Court granted Maiden leave to file an amended complaint. Maiden’s deadline to do so is Monday, September 6, 2021. The Company intends to vigorously defend its position. On September 3, 2021, Maiden filed its amended complaint, asserting a single cause of action against the DSS Defendants and RBC for an alleged TUFTA violation. Generally, Maiden is seeking the same relief requested in its original complaint. Maiden, however, has abandoned its request for treble damages. On September 17, 2021, the DSS Defendants filed a motion to dismiss the amended complaint seeking to dismiss Maiden’s TUFTA claim to the extent it seeks to avoid a transfer of assets owned by any of RBC’s subsidiaries, including but not limited to RBC Life Sciences USA, Inc. Further, the motion to dismiss also seeks the dismissal of Maiden’s TUFTA claim against Heuszel. The DSS Defendants’ motion to dismiss the amended complaint will be ripe for determination on or after October 22, 2021. Trial is currently set a tentative date for trial.December 5, 2022 on the Court’s two-week docket.
In addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results of operations, cash flows or our financial condition. The Company accrues for potential litigation losses when a loss is probable and estimable.
Contingent Litigation Payments - The Company retains the services of professional service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the milestones will be achieved, and the fees can be reasonably estimated. As of September 30, 2020, and December 31, 2019, the Company had not accrued any contingent legal fees pursuant to these arrangements.
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Contingent Payments - The Company is party to certain agreements with funding partners who have rights to portions of intellectual property monetization proceeds that the Company receives. As of September 30, 2020, there are no contingent payments due.
9. 10. Stockholders’ Equity
Sales of Equity – – On February 18, 2020, in accordance with the Chairman of the Company’s Board of Directors compensation plan as CEO of one of the Company’s subsidiaries,11,664 shares of the Company’s common stock were remitted in lieu of cash as settlement of his Q3 and Q4 2019 salary of $114,000 that was accrued as of December 31, 2019.
On February 20, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 740,741 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public offering price of $5.40 ($0.18 per shares pre-reverse stock split) per share, less certain underwriting discounts and commissions. The Company also granted the Underwriters a 45-day option to purchase up to 111,111 additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net offering proceeds to the Company from the Offering were approximately $4 million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses, and assuming no exercise of the Underwriter’s over-allotment option. The offering was closed on February 25, 2020. Heng Fai Ambrose Chan, the Chairman of the Company’s Board of Directors, purchased $2 million of shares in the Offering.
On May 15, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 769,230 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public offering price of $7.80 per share, less certain underwriting discounts and commissions. The Company also granted the Underwriters a 45-day option to purchase up to 115,384 additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net offering proceeds to the Company from the Offering were approximately $6.2 million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses, and assuming no exercise of the Underwriter’s over-allotment option. The offering was closed on June 26, 2020.
On July 7, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 1,028,800 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public offering price of $6.25 per share, less certain underwriting discounts and commissions. The Company also granted the Underwriters a 45-day option to purchase up to 154,320 additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net offering proceeds to the Company from the Offering were approximately $6.7 million. The offering was closed on July 10, 2020.
On July 28, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), which provided for the issuance and sale by the Company and the purchase by the Underwriter, in a firm commitment underwritten public offering (the “Offering”), of 453,333 shares of the Company’s common stock, $0.02 par value per share. Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public offering price of $7.50 per share, less certain underwriting discounts and commissions. The Company also granted the Underwriters a 45-day option to purchase up to 38,533 additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Offering. The net offering proceeds to the Company from the Offering were approximately $3.3 million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses. The initial offering was closed on July 31, 2020, and the overallotment was exercised on August 7, 2020.
In connection with the Share Exchange for Impact BioMedical described in Note 5, above, on August 18, 2020, the Company filed a Certificate of Amendment of its Certificate of Incorporation (the “Certificate of Amendment”) to increase the number of authorized shares of the Company, including 200,000,000 shares of Preferred Stock, with a par value of $0.02,$, of which 46,868 shares were designated Series A Preferred Stock. The Certificate of Amendment, the form of which was previously disclosed in a Schedule 14A Definitive Proxy Statement filed with the Securities and Exchange Commission on July 14, 2020. As described in Note 4 and 5, this transaction is a related party transaction.
Holders of the Series A Preferred Stock have no voting rights, except as required by applicable law or regulation, and no dividends accrue or are payable on the Series A Preferred Stock. The holders of Series A Preferred Stock are entitled to a liquidation preference at a liquidation value of $1,000$1,000 per share aggregating to $46,868,000,$46,868,000, and the Company has the right to redeem all or any portion of the then outstanding shares of Series A Preferred Stock, pro rata among all holders, at a redemption price per share equal to such liquidation value per share. The Series A Preferred Stock ranks senior to Common Stock and any other class of securities that is specifically designated as junior to the Series A Preferred Stock with respect to rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, in respect of a liquidation preference equal to its par value of $1,000.$1,000. A holder of Series A Preferred Stock has the option to convert each share of Series A Preferred Stock into a number of common shares in the Company equal to the $1,000 liquidation preference divided by a conversion price of $6.48$6.48 or shares subject to a Beneficial Ownership Limitation of 19.99%19.99%, as defined in the Share Exchange Agreement. Additionally, the Company has the option to require conversion of all outstanding Series A Preferred Stock into common stock at any time, subject to the Beneficial Ownership Limitation discussed. In aggregate the Series A Preferred Shares are convertible into shares of the Company’s common stock.stock at the date of issuance. The Company evaluated the classification of the Series A Preferred Shares under the guidance enumerated in ASC 470, 480, and 815 and determined that based on the features noted above the instruments are accounted for as permanent equity. On October 16, 2020, GBM converted shares of the Series A Convertible Preferred Stock into shares of the Company’s common A Shares. On May 28, 2021, GBM converted shares of the Series A Convertible Preferred Stock into shares of the Company’s common A Shares. On June 21, 2021, GBM converted shares of the Series A Convertible Preferred Stock into shares of the Company’s common A Shares.
On January 19, 2021, the Company entered into an underwriting agreement, as amended by Amendment No. 1 effective as of January 19, 2021 (the “Jan. 2021 Underwriting Agreement”), with Aegis Capital Corp., as representative of the underwriters, which provided for the issuance and sale by the Company and the purchase by the underwriters, in a firm commitment underwritten public offering (the “Jan. 2021 Offering”), of shares of the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the Jan. 2021 Underwriting Agreement, the shares were offered in a public offering at a price of $ per share, less certain underwriting discounts and commissions. The Company also granted the underwriters a 45-day option to purchase up to additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Jan. 2021 Offering. This overallotment was exercised in full. The net offering proceeds to the Company from the Jan. 2021 Offering are approximately $24.9 million, after deducting estimated underwriting discounts and commissions and other estimated offering expenses
On February 4, 2021, the Company entered into an underwriting agreement (the “Feb. 2021 Underwriting Agreement”) with Aegis Capital Corp., as representative of the underwriters named therein, which provided for the issuance and sale by the Company and the purchase by the underwriters, in a firm commitment underwritten public offering (the “Feb. 2021 Offering”), of shares of the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the Feb. 2021 Underwriting Agreement, the shares were sold at a public offering price of $ per share, less certain underwriting discounts and commissions. The Company also granted the underwriters a 45-day option to purchase up to additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the Feb. 2021 Offering, which over-allotment option was exercised in full on February 9, 2021. The net offering proceeds to the Company from the Feb. 2021 Offering are approximately $36.14 million, including the exercise of the underwriter’s over-allotment option, and after deducting estimated underwriting discounts and commissions and other estimated offering expenses.
On May 26, 2021, the Company entered into an underwriting agreement (the “May 2021 Underwriting Agreement”) with Aegis Capital Corp., as representative of the underwriters named therein, which provided for the issuance and sale by the Company and the purchase by the underwriters, in a firm commitment underwritten public offering (the “May 2021 Offering”), of shares of the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the May 2021 Underwriting Agreement, the shares were sold at a public offering price of $ per share, less certain underwriting discounts and commissions. The Company also granted the underwriters a 45-day option to purchase up to additional shares of the Company’s common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the May 2021 Offering, which over-allotment option was exercised in full on June 16, 2021. The net offering proceeds to the Company from the May 2021 Offering are approximately $45.75 million, including the exercise of the underwriter’s over-allotment option, and after deducting estimated underwriting discounts and commissions and other estimated offering expenses.
On September 3, 2021, DSS entered into a subscription agreement (the “AEI Subscription Agreement”) with AEI, which provided for an investment of up to $15,000,000 by AEI into the Company in exchange of an aggregate of shares of the Company’s common stock, $ par value per share. Subject to the terms and conditions contained in the AEI Subscription Agreement, the shares were issued at a purchase price of $ per share. Prior to this transaction, AEI indirectly held a significant investment in the Company through majority-owned subsidiaries. AEI’s Chairman and CEO, Heng Fai Chan, and a member of the AEI’s Board of Directors, Wu Wai Leung William, each serve on both the AEI Board and the Board of the Company.
Stock-Based Compensation - The Company records stock-based payment expense related to options and warrants based on the grant date fair value in accordance with FASB ASC 718. Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the three and nine months ended September 30, 2020,2021, the Company hadCompany’s stock compensation expense of approximately $216,000approximated $ and $, respectively or $0.08 basic and diluted gain per share ($203,000, or $0.25less than $ basic and diluted loss per share for the corresponding nine months ended September 30, 2019).share.
| 22 |
On April 3, 2020, by unanimous written consent, the Board of Directors authorized the Company to issue individual stock grants of the Company’s common stock, pursuant to the Company’s 2020 Employee, Director and Consultant Equity Incentive Plan, to certain managers and directors in the amount of 8,900 shares, at $6.60 per share which were immediately vested and issued. 5,800 of these shares where were fully vested restricted stock to members of the Company’s management team with a two-year lock-up period.
On June 4, 2020, the Company entered into an agreement with an investor relations firm to provide services over a 14-month period in exchange for shares of common stock. The shares were issued on the date of the agreement and were valued by the Company at $210,000.$210,000. The value assigned to the shares is included in other assets on the accompanying consolidated balance sheets and will be expensed into stock-based compensationmarketing expense as it is earned.
On For the three- and nine-month period ending September 23, 2020, by written consent of the Chief Executive Officer and the Chairman of the board,30, 2021, the Company to issue individual stock grants of the Company’s common stock, pursuant to the Company’s 2020 Employee, Directorrecognized $ and Consultant Equity Incentive Plan, to a consultant of the Company in the amount of 20,000 shares, at $4.48 per share which were immediately vested.$ respectively.
10. 11. Discontinued Operations
As a result of the insufficient cash flows from the operations of Plastic Printing Professionals, Inc. as well as the disruption of our business from the COVID-19 pandemic, on April 20,On August 14, 2020, the Company executedentered into a nonbinding letter of intent with a perspective buyer for substantially all the assets of this business line. As a result of insufficient cash flows, the disruption of our business from the Covid-19 pandemic,final Asset Purchase Agreement and with the intent to exit this business line, the Company terminated its production and office personnel and maintained only a few employees to assist in and facilitate the sale of its assets. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements.
The consideration paid to the Company under the Asset Purchase Agreement for the sale of the assets included a one-time cash payment of $683,000 $683,000 and a potentialan additional contingent earn-out payment of an aggregate amount of up to $517,000 $517,000 based on future quarterly gross revenue of the business to be conducted by the buyer with the sold assets. Consistent with the Company’s policy for accounting for gain contingencies, the earn out will be recorded when determined realizablerealizable. As of September 30, 2021, the Company has recognized $390,000 of this earn out, all of which did not occurwas recognized during the nine monthsyear ended September 30,December 31, 2020. The net effect of all assets disposed of with this transaction isresulted in a net loss $111,000 and isof $111,000 to the third quarter 2020. These amounts are included in Loss from Discontinued Operations. Included in its Right-of-use assets is the lease of the Company’s facility in Brisbane, Ca. In April 2021, the Company terminated this lease with the landlord effective March 31, 2021, and therefore, wrote off the asset and corresponding liability associated with the lease at March 31, 2021. As of December 31, 2020, $744,000 was record as non-current asset held for sale – discontinued operations on the consolidated balance sheet. Also recorded was $240,000 of current liabilities held for sale – discontinued operations and $505,000 of non-current liabilities held for sale – discontinued operations. The Company has incurred $204,000 of cost associated with wind-down activities for the nine-months ended September 30, 2021.
The following table shows the results of operations of the discontinued operation.
Schedule of Discontinued Operations
Plastic Printing Professionals, Inc.
Consolidated Statements of Operations and Comprehensive Loss - Discontinued Operations
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||
| September 30, 2020 | September 30, 2020 | |||||||
| Revenue: | ||||||||
| Printed products | $ | 243,000 | $ | 1,626,000 | ||||
| Total revenue | 243,000 | 1,626,000 | ||||||
| Costs and expenses: | ||||||||
| Cost of revenue, exclusive of depreciation and amortization | 382,000 | 1,644,000 | ||||||
| Selling, general and administrative (including stock-based compensation) | 130,000 | 715,000 | ||||||
| Depreciation and amortization | 37,000 | 152,000 | ||||||
| Impairment of goodwill | - | 685,000 | ||||||
| Total costs and expenses | 549,000 | 3,196,000 | ||||||
| Operating loss | (306,000 | ) | (1,570,000 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (7,000 | ) | (21,000 | ) | ||||
| Loss on sale of assets held for sale | (111,000 | ) | (111,000 | ) | ||||
| Income (loss) before income taxes | (424,000 | ) | (1,702,000 | ) | ||||
| Income tax expense (benefit) | - | - | ||||||
| Income (loss) from discontinued operations | (424,000 | ) | (1,702,000 | ) | ||||
On May 7, 2021, the Company completed the sale of 100% of the capital stock of DSS Digital Inc., the Company’s wholly-owned subsidiary (“DSS Digital”), to Proof Authentication Corporation (the “Buyer”) pursuant to a stock purchase agreement (the “Digital Purchase Agreement”). Pursuant to the terms of the Digital Purchase Agreement, the Buyer purchased DSS Digital for a purchase price of $5,000,000, consisting of $3 million in cash; $1.5 million in potential earn-out if certain performance targets are met during an earn-out period commencing on the one-year anniversary of the closing and ending the day before the six-year of the closing; and $0.5 million in trade credit or license fee rebates. Consistent with the Company’s policy for accounting for gain contingencies, the earn out will be recorded when determined realizable which did not occur during the three- and nine-months ended September 30, 2021. Also, the Company has not utilized the $0.5 million trade credit as of September 30, 2021. The net effect of sale of DSS Digital, inclusive of income tax, is a net gain of $2,226,000. This amount is included in Income (loss) from Discontinued Operations on the accompanying consolidated statement of operations.
The following tables show the major classes of assets and liabilities held for sale and results of operations of the discontinued operation.
Schedule of Assets and Liabilities Held for Sale
DSS Digital, Inc.
Consolidated Balance Sheets - Assets and Liabilities Held for Sale
| September 30, 2021 | December 31, 2020 | |||||||
| unaudited | unaudited | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | - | $ | 43,000 | ||||
| Accounts receivable, net | - | 321,000 | ||||||
| Prepaid expenses and other current assets | - | 167,000 | ||||||
| Total current assets | - | 531,000 | ||||||
| Property, plant and equipment, net | - | 46,000 | ||||||
| Total assets | - | 577,000 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | - | $ | 25,000 | ||||
| Accrued expenses and deferred revenue | - | 9,000 | ||||||
| Total current liabilities | - | 34,000 | ||||||
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DSS Digital, Inc.
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets– Assets and Liabilities Held For Sale
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Inventory | $ | - | $ | 342,000 | ||||
| Total current assets | - | 342,000 | ||||||
| Property, plant and equipment, net | - | 732,000 | ||||||
| Right-of-use assets | 886,000 | 1,081,000 | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Current portion of lease liability | 274,000 | 274,000 | ||||||
| Total current liabilities | 274,000 | 274,000 | ||||||
| Long term lease liability | 612,000 | 807,000 | ||||||
DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations - Discontinued Operations
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue: | ||||||||||||||||
| Printed products | $ | 243,000 | $ | 916,000 | $ | 1,626,000 | $ | 2,591,000 | ||||||||
| Total revenue | 243,000 | 916,000 | 1,626,000 | 2,591,000 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | 382,000 | 503,000 | 1,644,000 | 1,795,000 | ||||||||||||
| Selling, general and administrative (including stock based compensation) | 130,000 | 310,000 | 715,000 | 910,000 | ||||||||||||
| Depreciation and amortization | 37,000 | 122,000 | 152,000 | 207,000 | ||||||||||||
| Impairment of goodwill | - | - | 685,000 | - | ||||||||||||
| Total costs and expenses | 549,000 | 935,000 | 3,196,000 | 2,912,000 | ||||||||||||
| Operating loss | (306,000 | ) | (19,000 | ) | (1,570,000 | ) | (321,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (7,000 | ) | (9,000 | ) | (21,000 | ) | (24,000 | ) | ||||||||
| Loss on sale of assets held for sale | (111,000 | ) | - | (111,000 | ) | - | ||||||||||
| Income (loss) before income taxes | (424,000 | ) | (28,000 | ) | (1,702,000 | ) | (345,000 | ) | ||||||||
| Income tax expense (benefit) | - | - | - | - | ||||||||||||
| Income (loss) from discontinued operations | (424,000 | ) | (28,000 | ) | (1,702,000 | ) | (345,000 | ) | ||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Technology sales, services and licensing | $ | - | $ | 483,000 | $ | 535,000 | $ | 1,315,000 | ||||||||
| Total revenue | - | 483,000 | 535,000 | 1,315,000 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | - | 70,000 | 87,000 | 209,000 | ||||||||||||
| Selling, general and administrative (including stock-based compensation) | - | 226,000 | 338,000 | 835,000 | ||||||||||||
| Depreciation and amortization | - | 4,000 | 5,000 | 12,000 | ||||||||||||
| Total costs and expenses | - | 300,000 | 430,000 | 1,056,000 | ||||||||||||
| Operating income | - | 183,000 | 105,000 | 259,000 | ||||||||||||
| Income before income taxes | - | 183,000 | 105,000 | 259,000 | ||||||||||||
| Income tax expense (benefit) | - | - | - | - | ||||||||||||
| Income from discontinued operations | $ | - | $ | 183,000 | $ | 105,000 | $ | 259,000 | ||||||||
11. 12. Income Taxes
Our effective tax rate for the nine-months ended September 30, 2021, was 17.3% on continuing operations. There was no tax provision for September 30, 2020, due to the expected tax benefit from net operating losses (NOLs) being fully offset by an increase in the valuation allowance. The Company also recorded a discrete tax expense in the nine-month period ended September 30, 2021, of $83,000 related to the sale of DSS Digital which is included in discontinued operations.This discrete item relates to the tax effect of the GAAP over tax basis of a subsidiary that was sold in the nine-month period ended September 30, 2021. This discrete tax expense is included in the total tax provision of $596,000 which is in discontinued operations.
As of December 31, 2020, the Company has domestic net operating loss (“NOL”) carryforwards of approximately $56.7 million. The utilization of these NOLs is limited under Sec. 382 of the Internal Revenue Code. A valuation allowance has been recorded to reduce the deferred tax asset to the expected realizable amount, leaving $2.1 million available for use.
As of September 30, 2021, no benefit for losses incurred by our foreign subsidiaries have been recorded as those losses are not anticipated to provide any tax benefits in future periods.
There were 0 unrecognized tax benefits related to uncertain tax positions at September 30, 2021 and December 31, 2020.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. At September 30, 2021, there are no ongoing income tax audits.
13. Supplemental Cash Flow Information
The following table summarizes supplemental cash flows for the six monthsnine-months ended September 30, 20202021, and 2019:2020:
Schedule of Supplemental Cash Flow Information
| 2021 | 2020 | |||||||
| Cash paid for interest | $ | 139,000 | $ | 73,000 | ||||
| Non-cash investing and financing activities: | ||||||||
| Termination of right of use lease asset | $ | (744,000 | ) | $ | - | |||
| Termination of right of use lease liability | $ | 744,000 | $ | - | ||||
| Shares received for loan origination fee | $ | (3,000,000 | ) | $ | - | |||
| Shares received for prepaid loan interest | $ | (2,440,000 | ) | $ | - | |||
| Series A Preferred Shares issued for Impact BioMedical | $ | - | $ | 35,187,000 | ||||
| Common Shares issued for Impact Biomedical | $ | - | $ | 3,132,000 | ||||
| Long-lived assets acquired through settlement of notes receivable | $ | - | $ | 838,000 | ||||
| Acquisition of APB net assets | $ | 38,765,000 | - | |||||
| Shares issued for marketing services | $ | - | $ | 210,000 | ||||
| 24 |
| 2020 | 2019 | |||||||
| Cash paid for interest | $ | 101,000 | $ | 128,000 | ||||
| Non-cash investing and financing activities: | ||||||||
| Impact of adoption of lease accounting standards | $ | - | $ | 1,616,000 | ||||
| Gain from change in fair value of interest rate swap derivatives | $ | - | $ | 7,000 | ||||
| Common stock issued upon conversion of convertible note | $ | - | $ | 500,000 | ||||
| Equity issued to purchase intangible assets | $ | - | $ | 145,000 | ||||
| Common Shares issued for marketing services | $ | 210,000 | $ | - | ||||
| Common Shares issued for Impact BioMedical | $ | 3,132,000 | $ | - | ||||
| Series A Preferred Shares issued for Impact BioMedical | $ | 35,187,000 | $ | - | ||||
| Long-lived assets acquired through settlement of notes receivable | $ | 838,000 | $ | - | ||||
12. 14. Segment Information
The Company’s eightnine businesses linesare organized, managed and internally reported as four five operating segments. One of these operating segments, Premier Packaging, is the Company’s packaging and Printing is engagedprinting group. Premier Packaging operates in the paper board folding carton, smart packaging, and document security printing markets. It markets, manufactures, and production of paper,sells mailers, photo sleeves, sophisticated custom folding cartons, and cardboard documents with a wide range of features, including the Company’s patented technologiescomplex 3-dimensional direct mail solutions. These products are designed to provide functionality and trade secrets designed for the protection of documents against unauthorized duplication and altering.marketability while also providing counterfeit protection. A second, operating segment, Digital,BioHealth Group, invests in, or acquires companies in the biohealth and biomedical fields, including businesses focused on the advancement of drug discovery and prevention, inhibition, and treatment of neurological, oncological, and immune related diseases. This division is comprisedalso developing open-air defense initiatives, which curb transmission of DSS Digitalair-borne infectious diseases, such as tuberculosis and influenza. The BioHealth Group and DSS International, and is engaged in research, development, marketing and selling worldwide the Company’s digital products, including and primarily our AuthentiGuard® product, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. Thealso targeting unmet, urgent medical needs. A third operating segment, Technology Management,Securities and Fintech Group (“Securities”) was established to develop and/or acquire assets and investments in the securities trading and/or funds management arena. Further, Securities, in partnership with recognized global leaders in alternative trading systems, intends to own and operate in the US a single or multiple vertical digital asset exchanges for securities, tokenized assets, utility tokens, stable coins and cryptocurrency via a digital asset trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, STO and UTO listings on a primary mission has beenmarket(s), asset digitization/tokenization (securities, currency and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). Also in this segment is the Company’s real estate investment trust (“REIT”), organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to monetize its various patent portfolios through commercial litigationa single operator under a triple-net lease. the REIT was formed to originate, acquire, and licensing. Except for investment in its social networking related patents, we have historically partnered with various third-party funding groups in connection with patent monetization programs.lease a credit-centric portfolio of licensed medical real estate. The fourth segment, Direct Marketing, direct marketing or network marketing is the business of selling products orMarketing/Online Sales Group, provides services directly to the public, e.g., by online or telephone selling, rather than through retailers. We believe this business has significant growth potentialassist companies in the blossoming “gig economy” with comparisonsemerging growth gig business model of peer-to-peer decentralized sharing marketplaces. It specializes in marketing and distributing its products and services through its subsidiary and partner network, using the popular gig economic marketing strategy as a form of direct marketing. Direct marketing products include, among other things, nutritional and personal care products sold throughout North America, Asia Pacific and Eastern Europe. The fifth business line, Investment Banking, is organized for the purposes of being a financial network holding company, focused providing commercial loans and on acquiring equity positions in (i) undervalued commercial bank(s), bank holding companies and nonbanking licensed financial companies operating in the United States, South East Asia, Taiwan, Japan and South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, problem asset management, SPAC (special purpose acquisition company) consulting, and advisory capital raising services. From this financial platform, the growthCompany shall provide an integrated suite of financial services for businesses that is being realizedshall include commercial business lines of credit, land development financing, inventory financing, third party loan servicing, and services that address the financial needs of the world Gig Economy.
Our segment structure presented below represents a change from the prior year for the inclusion of our BioHealth Group, Securities, and Investment Banking segments and the removal of our Plastics segment, Digital Group and IP Technology Management segment as the Plastics segment was discontinued in parallel businesses such2020, DSS Digital was sold and discontinued in May 2021 and activities surrounding our IP Technology Management segment have significantly decreased. The amounts for these segments have been included in the Corporate reporting segment for the three- and nine-months ended September 30, 2021 and 2020, as ride sharing.necessary, below for reconciliation purposes.
Approximate information concerning the Company’s operations by reportable segment for the three and Ninenine months ended September 30, 20202021, and 20192020 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:
Schedule of Operations by Reportable Segment
Three Months Ended September 30, 2021 | Packaging and Printing | Investment Banking | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||||
| Revenue | $ | 3,416,000 | $ | - | $ | 966,000 | $ | - | $ | 184,000 | $ | - | $ | 4,566,000 | |||||||||||||
| Depreciation and amortization | 152,000 | - | 100,000 | 278,000 | 135,000 | 74,000 | 739,000 | ||||||||||||||||||||
| Interest expense | 11,000 | - | - | - | 37,000 | (17,000 | ) | 31,000 | |||||||||||||||||||
| Stock based compensation | 1,000 | - | - | - | - | 12,000 | 13,000 | ||||||||||||||||||||
| Net income (loss) from continuing operations | 358,000 | 64,000 | (1,304,000 | ) | (647,000 | ) | (835,000 | ) | (4,311,000 | ) | (6,675,000 | ) | |||||||||||||||
| Capital expenditures | 1,399,000 | - | - | - | 186,000 | 55,000 | 1,640,000 | ||||||||||||||||||||
| Identifiable assets | 24,752,000 | 60,388,000 | 43,695,000 | 55,848,000 | 11,376,000 | 23,017,000 | 219,076,000 | ||||||||||||||||||||
Three Months Ended September 30,2020 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||
| Revenue | $ | 2,971,000 | $ | 715,000 | $ | - | $ | - | $ | - | $ | 3,686,000 | ||||||||||||
| Depreciation and amortization | 165,000 | 1,000 | - | - | 78,000 | 244,000 | ||||||||||||||||||
| Interest expense | 24,000 | - | - | - | 5,000 | 29,000 | ||||||||||||||||||
| Stock based compensation | 3,000 | - | - | - | 125,000 | 128,000 | ||||||||||||||||||
| Net income (loss) from continuing operations | 136,000 | (1,139,000 | ) | - | - | 6,185,000 | 5,182,000 | |||||||||||||||||
| Capital expenditures | 1,000 | 1,000 | - | - | - | 2,000 | ||||||||||||||||||
| Identifiable assets | 10,013,000 | 1,809,000 | - | - | 68,305,000 | 80,127,000 | ||||||||||||||||||
Nine Months Ended September 30, 2021 | Packaging and Printing | Investment Banking | Direct Marketing | Biohealth Group | Securities | Corporate | Total | ||||||||||||||||||||
| Revenue | $ | 10,652,000 | $ | - | $ | 2,382,000 | $ | - | $ | 184,000 | $ | - | $ | 13,218,000 | |||||||||||||
| Depreciation and amortization | 459,000 | - | 419,000 | 835,000 | 134,000 | 228,000 | 2,075,000 | ||||||||||||||||||||
| Interest expense | 49,000 | - | 2,000 | 1,000 | 87,000 | 18,000 | 157,000 | ||||||||||||||||||||
| Stock based compensation | 2,000 | - | - | - | - | 40,000 | 42,000 | ||||||||||||||||||||
| Net income (loss) from continuing operations | 641,000 | 64,000 | (9,088,000 | ) | (1,955,000 | ) | (1,066,000 | ) | (10,058,000 | ) | (21,462,000 | ) | |||||||||||||||
| Capital expenditures | 2,621,000 | - | 6,000 | - | 6,750,000 | 4,000 | 9,381,000 | ||||||||||||||||||||
| Identifiable assets | 24,752,000 | 60,388,000 | 43,695,000 | 55,848,000 | 11,376,000 | 23,017,000 | 219,076,000 | ||||||||||||||||||||
Nine Months Ended September 30,2020 | Packaging and Printing | Direct Marketing | Biohealth Group | Securities | Corporate | Total | |||||||||||||||||||
| Revenue | $ | 8,409,000 | $ | 1,793,000 | $ | - | $ | $ | - | - | $ | 10,202,000 | |||||||||||||
| Depreciation and amortization | 584,000 | 1,000 | - | - | 227,000 | 812,000 | |||||||||||||||||||
| Interest expense | 79,000 | - | - | - | 23,000 | 102,000 | |||||||||||||||||||
| Stock based compensation | 11,000 | - | - | - | 170,000 | 181,000 | |||||||||||||||||||
| Net income (loss) from continuing operations | 222,000 | (960,000 | ) | - | - | 4,249,000 | 3,511,000 | ||||||||||||||||||
| Capital expenditures | 91,000 | 1,000 | - | - | 1,000 | 93,000 | |||||||||||||||||||
| Identifiable assets | 10,013,000 | 1,809,000 | - | - | 68,305,000 | 80,127,000 | |||||||||||||||||||
| Three Months Ended September 30, 2020 | Packaging and Printing | Plastics | Digital | Technology Management | Direct Marketing | Corporate | Total | |||||||||||||||||||||
| Revenue | $ | 2,972,000 | $ | - | $ | 483,000 | $ | - | $ | 714,000 | $ | - | $ | 4,169,000 | ||||||||||||||
| Depreciation and amortization | 165,000 | - | 9,000 | 21,000 | 1,000 | 50,000 | 246,000 | |||||||||||||||||||||
| Interest expense | 24,000 | - | 2,000 | - | - | 3,000 | 29,000 | |||||||||||||||||||||
| Stock based compensation | 3,000 | - | 7,000 | - | - | 122,000 | 132,000 | |||||||||||||||||||||
| Net Income (loss) from continuing operations | 136,000 | - | 82,000 | (36,000 | ) | (1,139,000 | ) | 6,323,000 | 5,366,000 | |||||||||||||||||||
| Capital expenditures | 1,000 | - | - | - | 1,000 | - | 2,000 | |||||||||||||||||||||
| Identifiable assets | 10,013,000 | 1,209,000 | 657,000 | 1,000 | 1,809,000 | 68,304,000 | 81,993,000 | |||||||||||||||||||||
| Three Months Ended September 30, 2019 | Packaging and Printing | Plastics | Digital | Technology Management | Direct Marketing | Corporate | Total | |||||||||||||||||||||
| Revenue | $ | 2,119,000 | $ | - | $ | 498,000 | $ | - | $ | - | $ | - | $ | 2,617,000 | ||||||||||||||
| Depreciation and amortization | 228,000 | - | 7,000 | 62,000 | - | - | 297,000 | |||||||||||||||||||||
| Interest expense | 24,000 | - | 2,000 | - | - | 22,000 | 48,000 | |||||||||||||||||||||
| Stock based compensation | 4,000 | - | 20,000 | - | - | 249,000 | 273,000 | |||||||||||||||||||||
| Net loss from continuing operations | (322,000 | ) | - | 139,000 | (203,000 | ) | - | (836,000 | ) | (1,222,000 | ) | |||||||||||||||||
| Capital expenditures | - | - | - | - | - | - | - | |||||||||||||||||||||
| Identifiable assets | 9,156,000 | 3,884,000 | 899,000 | - | - | 4,611,000 | 18,550,000 | |||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Packaging and Printing | Plastics | Digital | Technology Management | Direct Marketing | Corporate | Total | |||||||||||||||||||||
| Revenue | $ | 8,394,000 | $ | - | $ | 1,331,000 | $ | - | $ | 1,792,000 | $ | - | $ | 11,517,000 | ||||||||||||||
| Depreciation and amortization | 584,000 | - | 28,000 | 48,000 | 1,000 | 163,000 | 824,000 | |||||||||||||||||||||
| Interest expense | 79,000 | - | 9,000 | - | - | 13,000 | 101,000 | |||||||||||||||||||||
| Stock based compensation | 11,000 | - | 37,000 | - | - | 168,000 | 216,000 | |||||||||||||||||||||
| Net Income (loss) from continuing operations | 222,000 | - | (120,000 | ) | (325,000 | ) | (960,000 | ) | 4,954,000 | 3,771,000 | ||||||||||||||||||
| Capital expenditures | 91,000 | - | 9,000 | - | 1,000 | 1,000 | 102,000 | |||||||||||||||||||||
| Identifiable assets | 10,013,000 | 1,209,000 | 657,000 | 1,000 | 1,809,000 | 68,304,000 | 81,993,000 | |||||||||||||||||||||
| Nine Months Ended September 30, 2019 | Packaging and Printing | Plastics | Digital | Technology Management | Direct Marketing | Corporate | Total | |||||||||||||||||||||
| Revenue | $ | 8,434,000 | $ | 1,424,000 | $ | - | $ | - | $ | - | $ | 9,858,000 | ||||||||||||||||
| Depreciation and amortization | 675,000 | - | 24,000 | 144,000 | - | 1,000 | 844,000 | |||||||||||||||||||||
| Interest expense | 76,000 | - | 6,000 | - | - | 22,000 | 104,000 | |||||||||||||||||||||
| Stock based compensation | 13,000 | - | 62,000 | - | - | 256,000 | 331,000 | |||||||||||||||||||||
| Net loss from continuing operations | (254,000 | ) | - | (224,000 | ) | (418,000 | ) | - | (1,490,000 | ) | (2,386,000 | ) | ||||||||||||||||
| Capital expenditures | 574,000 | - | 24,000 | - | - | 4,000 | 602,000 | |||||||||||||||||||||
| Identifiable assets | 9,156,000 | 3,884,000 | 899,000 | - | - | 4,611,000 | 18,550,000 | |||||||||||||||||||||
The following tables disaggregate our business segment revenues by major source:
Schedule of Disaggregation of Revenue
Printed Products Revenue Information:
| Printed Products Revenue Information: | ||||||||
| Three months ended September 30, 2020 | ||||||||
| Three months ended September 30, 2021 | ||||||||
| Packaging Printing and Fabrication | $ | 2,568,000 | $ | 3,373,000 | ||||
| Commercial and Security Printing | 403,000 | 43,000 | ||||||
| Total Printed Products | $ | 2,971,000 | $ | 3,416,000 | ||||
| Three months ended September 30, 2019 | ||||||||
| Three months ended September 30, 2020 | ||||||||
| Packaging Printing and Fabrication | $ | 1,883,000 | $ | 2,568,000 | ||||
| Commercial and Security Printing | 236,000 | 403,000 | ||||||
| Total Printed Products | $ | 2,119,000 | $ | 2,971,000 | ||||
| Nine months ended September 30, 2020 | ||||||||
| Nine months ended September 30, 2021 | ||||||||
| Packaging Printing and Fabrication | $ | 7,631,000 | $ | 10,428,000 | ||||
| Commercial and Security Printing | 774,000 | 224,000 | ||||||
| Total Printed Products | $ | 8,405,000 | $ | 10,652,000 | ||||
| Nine months ended September 30, 2019 | ||||||||
| Nine months ended September 30, 2020 | ||||||||
| Packaging Printing and Fabrication | $ | 7,619,000 | $ | 7,635,000 | ||||
| Commercial and Security Printing | 814,000 | 774,000 | ||||||
| Total Printed Products | $ | 8,433,000 | $ | 8,409,000 | ||||
Technology Sales, Services and Licensing Revenue Information:
| Three months ended September 30, 2020 | ||||
| Information Technology Sales and Services | $ | 24,000 | ||
| Digital Authentication Products and Services | 359,000 | |||
| Royalties from Licensees | 100,000 | |||
| Total Printed Products | $ | 483,000 | ||
| Three months ended September 30, 2019 | ||||
| Information Technology Sales and Services | $ | 46,000 | ||
| Digital Authentication Products and Services | 307,000 | |||
| Royalties from Licensees | 145,000 | |||
| Total Printed Products | $ | 498,000 | ||
| Nine months ended September 30, 2020 | ||||
| Information Technology Sales and Services | $ | 65,000 | ||
| Digital Authentication Products and Services | 947,000 | |||
| Royalties from Licensees | 307,000 | |||
| Total Printed Products | $ | 1,319,000 | ||
| Nine months ended September 30, 2019 | ||||
| Information Technology Sales and Services | $ | 151,000 | ||
| Digital Authentication Products and Services | 857,000 | |||
| Royalties from Licensees | 416,000 | |||
| Total Printed Products | $ | 1,424,000 | ||
Direct Marketing
| Three months ended September 30, 2021 | ||||
| Direct Marketing Internet Sales | $ | 966,000 | ||
| Total Direct Marketing | $ | 966,000 | ||
| Three months ended September 30, 2020 | ||||
| Direct Marketing Internet Sales | $ | 715,000 | ||
| Total Direct Marketing | $ | 715,000 | ||
| Nine months ended September 30, 2021 | ||||
| Direct Marketing Internet Sales | $ | 2,382,000 | ||
| Total Direct Marketing | $ | 2,382,000 | ||
| Nine months ended September 30, 2020 | ||||
| Direct Marketing Internet Sales | $ | 1,793,000 | ||
| Total Direct Marketing | $ | 1,793,000 | ||
Securities
| Three months ended September 30, 2021 | ||||
| Rental Income | $ | 184,000 | ||
| Total Rental Income | $ | 184,000 | ||
| Three months ended September 30, | ||||
| $ | - | |||
| Total | $ | - |
| Nine months ended September 30, 2020 | ||||
| Direct Marketing Internet Sales | $ | 1,793,000 | ||
| Total Direct Marketing | $ | 1,793,000 | ||
| Nine months ended September 30, 2021 | ||||
| Rental Income | $ | 184,000 | ||
| Total Rental Income | $ | 184,000 | ||
| Nine months ended September 30, | ||||
| $ | - | |||
| Total | $ | - |
15. Subsequent Events
On October 13, 2021, DFMI entered into a loan agreement with LVAM, whereby DFMI would lend to LVAM a principal sum not to exceed $3,000,000 with interest charged at a variable rate and maturing on October 12, 2022,with an auto renewal period of three months.
On November 4, 2021, AMRE acquired three medical facilities located in Fort Worth, Texas, Plano, Texas, and Pittsburgh, Pennsylvania for a purchase price of $62,000,000. These facilities are tenanted and operated by LifeCare Hospitals, a specialty hospital operator with a focus on long-term acute and critical care. The medical facilities acquired by AMRE are currently under an 18-year lease with eleven years remaining and an option to renew for an additional five years. These facilities have a total capacity of 195 hospital beds spanning a gross floor area of approximately 320,000 square feet. The purchase price was funded through multiple borrowing facilities, including $13,940,000 in the form of a convertible promissory note from APB, a related party, and $8,350,000 from Alset International Limited. The terms under the convertible promissory note with APB, includes interest on the outstanding balance at a rate of eight percent (8.00%) per annum and is to be payable in cash quarterly in arrears commencing on the 29th day of January 2022, and continue on the 29th day of each April, July, October and January thereafter through maturity. AMRE may prepay or repay all or any portion of the note in cash upon thirty (30) days written notice to the Company, without premium or penalty. At the option of the Company, the unpaid principal and interest balance on the note may be converted, in whole or in part, at any time on or before the maturity date, into fully-paid and non-assessable shares of common stock par value $0.001 per share of common stock of AMRE at a conversion rate equal to $10.00 per share. These facilities have varying maturity dates through November 2023.
13. SUBSEQUENT EVENTS
On October 7, 2020, DSS Securities took part in an IPO of Presidio Property Trust, Inc., a Maryland corporation that invests primarily in commercial properties, such as office, industrial and retail properties, as well as in residential model home properties, in regionally dominant markets across the United States. We purchased 200,000 shares at $5.00 per share for a total of $1,000,000.
On October 16, 2020, Global BioMedical Pte Ltd. converted 4,293 shares of its Series A Preferred Stock of DSS having a par value of $0.02 per share in exchange for 662,500 restricted shares of the Common Stock of the Company having a par value of $.02 per share based upon a liquidation value of $1,000 and a conversion price of $6.48 per share pursuant to Section 8.2(a) of the Certificate of Designation of Series A Convertible Preferred Stock.
On October 20, 2020, the Company filed its preliminary Form 14A proxy materials for the 2020 Annual Meeting of Stockholders. The purpose of the meeting is to (1.) To elect eight director nominees to the Company’s Board of Directors to hold office until the next Annual Meeting of Stockholders; (2.) To ratify Freed Maxick CPAs, P.C. as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2020; (3.) To provide an advisory vote on executive compensation; (4.) To approve, pursuant to Rule 713 of the NYSE American, the potential issuance of shares of the Corporation’s common stock, par value $0.02 per share representing equal to or greater than 20% but not more than 50.99% of presently outstanding stock, issuable upon conversion of our Series A Convertible Preferred Stock, issued by the Company to Global BioMedical Pte. Ltd on August 21, 2020 in accordance with the Share Exchange Agreement dated April 27, 2020, by increasing the beneficial ownership limitation of the Series A Convertible Preferred Stock; and (5.) To approve the reincorporation of the Company from New York to Texas, pursuant to a merger of the Company with and into a newly-formed Texas corporation that will initially be a wholly-owned subsidiary of the Company, resulting in a change in name of the Company from “Document Security Systems, Inc.” to “Alset, Inc.”
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for the historical information contained herein, this report contains forward-looking statements (identified by the words such as “estimate”, “project”, “anticipate”, “plan”, “expect”, “intend”, “believe”, “hope”, “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, that could cause actual results to differ materially from the results anticipated in the forward-looking statements.
Overview
Document Security Systems,
DSS, Inc. (the(together with its consolidated subsidiaries, referred to herein as “DSS,” “we,” “us,” “our” or the “Company”) currently operates in eight (8)nine (9) distinct business lines segments through eight (8) DSS subsidiaries locatedwith operations and locations around the globe. These business lines are: (1) Premier Packaging, (2) Direct Marketing/Online Sales Group, (3) IP Monetization, (4) BioHealth Group, (5) Securities and Fintech Group, (6) Energy Group, (7) Secure Living, (8) Blockchain Technology, and (9) Investment Banking. Each of these business lines are in different stages of development, growth, and income generation.
Of the eight subsidiaries, threenine business lines, two of the those have historically been the led by core subsidiaries of the Company: (1) Premier Packaging Corporation (DSS Packaging and Printing Group), (2) DSS Digital Inc.(“Premier Packaging”), and its subsidiaries (DSS Digital Group), and (3)(2) DSS Technology Management, Inc. (DSS Technology Management)(“IP Technology”). Premier Packaging Corporation operates in the paper board folding carton, smart packaging, and document security printing markets. It markets, manufactures, and sells paper productsmailers, photo sleeves, sophisticated custom folding cartons, and complex 3-dimensional direct mail solutions designed to protect valuable information from unauthorized scanning, copying,provide functionality, marketability, and digital imaging. DSS Digital Inc., researches, develops, marketssustainability to product packaging while providing counterfeit protection and sells the Company’s digital products worldwide. The primary product is AuthentiGuard®, which is a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. DSSconsumer engagement platform. IP Technology Management Inc., manages, licenses, and acquires intellectual property (“IP”) assets for the purpose of monetizing these assets through a variety of value-enhancing initiatives, including, but not limited to, investments in the development and commercialization of patented technologies, licensing, strategic partnerships, and commercial litigation. In 2020, under its (3) Decentralize Sharing Systems, Inc. (“Decentralized”) subsidiary, the Company created a fourththird business segment, Direct Marketing.Marketing/Online Sales Group (“Direct”). This group provides services to assist companies in the growing gig economic business model of peer-to-peer direct marketing. Direct specializes in marketing or network marketing is designedand distributing its products and services through its subsidiaries, partner networks, and online marketplaces. Products include health and wellness for personal use, healthy living and lifestyle, and travel. Direct will also help to sell products orsupport the direct selling industry by offering services directly to the public through independent distributors, rather than selling through the traditional retail market.its piers that streamline operations, enhance financing, and provide back-end business continuity.
In addition to the fourthree business lines and subsidiaries listed above in 2019 and early 2020, DSS has created fivefour new business lines, and wholly owned subsidiaries. (4) Blockchain Technology, led by DSS Blockchain Security, Inc.Inc (“DSS Blockchain”)., a Nevada corporation, that intends to specializespecializes in the development of blockchain security technologies for tracking and tracing solutions for supply chain logistics and cyber securities across global markets. (5) Decentralize Sharing Systems,Securities and Fintech, led by DSS Securities, Inc. (“DSS Securities”), a Nevada corporation, seeks to provide services to assist companies in the new business model of the peer-to-peer decentralized sharing marketplaces. (6) DSS Securities, Inc., a Nevada corporation, has beenwas established to develop and/or to acquire assets and investments in the securities trading and/or funds management arena,arena. Further, Securities, in partnership with recognized global leaders in alternative trading systems, intends to own and to pursue two parallel streams ofoperate in the US a single or multiple vertical digital asset exchanges in multiple jurisdictions: (i) securitized token exchanges, focusing on digitizedfor securities, tokenized assets, from different vertical industries and (ii) utilities token exchanges, focusing on “blue-chip” utility tokens, stable coins and cryptocurrency via a digital asset trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, STO and UTO listings on a primary market(s), asset digitization/tokenization (securities, currency and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). Also in this segment is the Company’s real estate investment trust (“REIT”), organized for the purposes of acquiring hospitals and other acute or post-acute care centers from solid businesses. (7)leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. (6) BioHealth Group, led by DSS BioHealth Security, Inc. (“DSS BioHealth”), a Nevada corporation, is our business line which we will intend to invest in or to acquire companies related to the biohealthbio-health and biomedical field, including businesses focused on the research to advance drug discovery and development for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. This new division will place special focus on open-air defense initiatives, which curb transmission of air-borne infectious diseases such as tuberculosis and influenza, among others. (8)(7) Secure Living, led by DSS Secure Living, Inc. (“DSS Secure Living”), a Nevada Corporation, intends to developdevelops top of the line advanced technology, energy efficiency, quality of life living environments and home security for everyone for new construction and renovations of residential single and multifamily living facilities. Aside from Decentralized Sharing Systems, Inc.The activity in DSS Blockchain and DSS BioHealth Security, Inc. the activity in the these newly created subsidiaries haveSecure Living has been minimal or in various start-up or organizational phases. (8) Energy Group, organized under the Company’s subsidiary Alset Energy, Inc., a Texas corporation, has been established to help lead the Company’s clean energy future with a focus on environmental responsibility and sustainability measures. (9) Investment Banking, created in Sept 2021 as part of the Company’s acquisition of American Pacific Bancorp. Inc., a Texas corporation, is organized for the purposes of being a financial network holding company, focused on acquiring equity positions in (i) undervalued commercial bank(s), bank holding companies and nonbanking licensed financial companies operating in the United States, South East Asia, Taiwan, Japan and South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, problem asset management, SPAC (special purpose acquisition company) consulting, and advisory capital raising services. From this financial platform, the Company shall provide an integrated suite of financial services for businesses that shall include commercial business lines of credit, land development financing, inventory financing, third party loan servicing, and services that address the financial needs of the world Gig Economy.
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On March 3, 2020, the Company, via its subsidiary DSS Securities, entered into a share subscription agreement and loan arrangement with LiquidValue Asset Management Pte Ltd., AMRE Asset Management, Inc. and American Medical REIT Inc. under which it acquired a 52.5% controlling ownership interest in AMRE Asset Management Inc. (“AAMI”) which currently has a 93% equity interest in American Medical REIT Inc. (“AMRE”). AAMI is a real estate investment trust (“REIT”) management company that sets the strategic vision and formulate investment strategy for AMRE. It manages the REIT’s assets and liabilities and provides recommendations to AMRE on acquisition and divestments in accordance with the investment strategies. AMRE is a Maryland corporation, organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. AMRE was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. AMRE is planned to qualify as a Real Estate Investment Trust for federal income tax purposes, which will provide. AMRE’s investors the opportunity for direct ownership of Class A licensed medical real estate. On June 18, 2021, DSS Securities, entered into a stock purchase agreement with AMRE to acquire 264,525 Class A Common Shares of AMRE at a per share price of $10, for a total consideration of $2,645,250. The additional 264,525 Class A Common Shares acquired increases the Company’s total equity interest in AMRE to approximately 93%.
On August 21, 2020, the Company, completed its acquisition of Impact BioMedical, Inc. (“Impact BioMedical”), pursuant to a Share Exchange Agreement by and among the Company, DSS BioHealth Security, Inc. (“DSS BioHealth”), Alset International Limited (formally Singapore eDevelopment Ltd.), and Global Biomedical Pte Ltd. (“GBM”), which was previously approved by the Company’s shareholders (the “Share Exchange”). Under the terms of the Share Exchange, the Company issued 483,334 shares of the Company’s common stock, par value $0.02 per share, nominally valued at $6.48 per share, and 46,868 newly issued shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). As a result of the Share Exchange, Impact BioMedical is now a wholly owned subsidiary of DSS BioHealth, the Company’s wholly owned subsidiary.
Impact BioMedical strives to leverage its scientific know-how and intellectual property rights to provide solutions that have been plaguing the biomedical field for decades. By tapping into the scientific expertise of its partners, Impact BioMedical has undertook a concerted effort in the research and development (R&D), drug discovery and development for the prevention, inhibition, and treatment of neurological, oncological and immune related diseases.
In August 2020, the Company’s wholly owned subsidiary, DSS Securities, Inc. entered into a corporate venture to form and operate a real estate title agency, under the name and flagging of Alset Title Company, Inc, a Texas corporation (“ATC”). DSS Securities, Inc. shall own 70% of this venture with the other two shareholders being attorneys necessary to the state application and permitting process.
On October 7, 2020, DSS Securities took part in an initial public offering of Presidio Property Trust, Inc. (“Presidio”), a Maryland corporation, that invests primarily in commercial properties, such as office, industrial and retail properties, as well as in residential across the United States. As part of this offering, we purchased 200,000 shares of Presidio’s Series A Common Stock at $5.00 per share for a total purchase price of $1,000,000.
Effective December 9, 2020, Impact BioMedical entered into an exclusive distribution agreement with BioMed Technologies Asia Pacific Holdings Limited (“BioMed”), which is focused on manufacturing natural probiotics. Under the terms of this distribution agreement, Impact BioMedical will directly market, advertise, promote, distribute and sell certain BioMed products to resellers. The products to be distributed by Impact BioMedical include BioMed’s PGut Premium ProbioticsTM, PGut Allergy ProbioticsTM, PGut SupremeSlim ProbioticsTM, PGut Kids ProbioticsTM, and PGut Baby ProbioticsTM. Under the terms of the ten-year distribution agreement, Impact BioMedical will have exclusive rights to distribute the products within the United States, Canada, Singapore, Malaysia, and South Korea and non-exclusive distribution rights in all other countries.
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On February 8, 2021, DSS Securities announced that it entered into a joint venture (“JV”) with Coinstreet Partners (“Coinstreet”), a global decentralized digital investment banking group and digital asset financial service firm, and GSX Group (“GSX”), a global digital exchange ecosystem for the issuance, trading, and settlement of tokenized securities, using its proprietary blockchain solution. The JV leverages the operational strengths and assets of three key leaders in their field, combining traditional capital market experience, Fintech innovations, and business networks from three continents, North America, Europe, and Asia, to capitalize on unique digital asset opportunities. The JV reported that it intended to first pursue a digital securities exchange license in the US. Moving forward, this JV will be the key operational company building and operating a digital securities exchange that utilizes the GSX STACS blockchain technology, serving corporate issuers and investors in the sector.
On February 25, 2021, DSS Securities announced its acquisition of an equity interest in WestPark Capital, Inc.(“WestPark”) and an investment in BMI Capital International LLC (“BMICI”). DSS Securities executed two separate transactions that were designed to grow the securities division by signing a binding note and stock exchange letter of intent to own 7.5% of the issued and outstanding shares of WestPark and acquiring 24.9% of BMICI through a purchase agreement. WestPark is a full-service investment banking and securities brokerage firm which serves the needs of both private and public companies worldwide, as well as individual and institutional investors. BMI is a private investment bank specializing in corporate finance advising, raising equity, and venture services, providing a global “one-stop” corporate consultancy to listed companies. From corporate finance to professional valuation, corporate communications to event management, BMICI services companies in the US, Hong Kong, Singapore, Taiwan, Japan, Canada, and Australia.
On March 1, 2021, Decentralized Sharing Systems, Inc. (“Decentralized”) announced that it increased its investment in Sharing Services Global Corporation (“Sharing Services” or “SHRG”), a publicly traded company dedicated to maximizing shareholder value through the acquisition and development of innovative companies, products, and technologies in the direct selling industry, through a $30 million convertible promissory note dated April 5, 2021. Decentralized’s financing was made as an investment that would help accelerate Sharing Services sales and growth, as well as international expansion, with the expectation that such capital reserves would help make Sharing Services a dominant player in the global marketplace over the next two years. It was reported that the new $30 million investment would have the potential to exponentially increase Sharing Services sales channels and substantially expand its product portfolio, and to position Sharing Services to capitalize on consolidation and roll up opportunities of other direct selling companies. In the joint announcement, Sharing Services reported that the additional funding would now allow it to accelerate its global expansion with a direct focus on the Asian markets, and specifically in countries such as South Korea, Japan, Hong Kong, China, Singapore, Taiwan, Thailand, Malaysia, and the Philippines. In accordance with the April 5, 2021, convertible promissory note, SHRG issued to the Company 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan origination fee and 12,000,000 shares in prepayment of interest for the first year. As of September 30, 2021, the Company held 91,460,978 class A common shares equating to a 46.8% ownership interest in SHRG with aggregate fair value of the Company’s investment in SHRG at September 30, 2021, of approximately $8,745,000. The Company, via three (3) of the Company’s existing board members, currently holds four (4) of the five (5) SHRG board of director seats. Mr. John “JT” Thatch, DSS’s Lead Independent Director and as well the CEO of SHRG is on the SHRG Board, along with Mr. Heng Fai Ambrose Chan, DSS’s Executive Chairman of the board of directors (joined the SHRG Board effective May 4, 2020), and Mr. Frank D. Heuszel, the CEO of the Company (joined the SHRG Board effective September 29, 2020).
On March 15, 2021, the Company, through one of its subsidiaries, DSS BioMedical International, Inc. entered into a Stock Purchase Agreement (the “Agreement”) with Vivacitas Oncology Inc. (“Vivacitas”), to purchase 500,000 shares of its common stock at the per share price of $1.00, with an option to purchase 1,500,000 additional shares at the per share price of $1.00. In addition, under the terms of the Agreement, the Company will be allocated two seats on the board of Vivacitas. On March 18, 2021, the Company entered into an agreement with Alset EHome International, Inc. (“Seller”) to acquire the Seller’s wholly owned subsidiary Impact Oncology PTE Ltd for the purchase price of $2,480,000 to effectively purchase ownership of 2,480,000 shares of common stock of Vivacitas.. This agreement includes an option to purchase an additional 250,000 shares of common stock. As a result of these two transactions, which were closed on March 21, 2021 and March 29, 2021, respectively, the Company owns an approximate 15.7% equity position in Vivacitas. The Seller’s largest shareholder is Mr. Heng Fai Ambrose Chan, the Chairman of the Company’s board of directors and its largest shareholder. On July 22, 2021, the Company exercised 1,000,000 of the available options under the Vivacitas Agreement #1, increasing the Company’s equity position in Vivacitas to 19.3%.
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On April 21, 2021, the Company announced its wholly owned subsidiary, Premier Packaging Corporation’s intentions to relocate from its current 48,000 square-foot manufacturing facility from Victor, NY to a new 105,000 square-foot facility in the Town of Henrietta, NY approximately 15 miles from its Victor location by the end of 2021. In connection with this relocation, Premier Packaging has entered into an agreement to sell its current Victor location with the anticipated closing date of January 31, 2022.
On May 13, 2021, Sentinel Brokers, LLC., a subsidiary of the Company entered into a stock purchase agreement (“Sentinel Agreement”) to acquire a 24.9% equity position of Sentinel Brokers Company, Inc. (“Sentinel”), a company registered in the state of New York, for the purchase price of $300,000. Under the terms of this agreement, the Company as the option to purchase an additional 50.1% of the outstanding Class A Common Shares. Upon the exercising of this option, but no earlier than one year following the effective date the Sentinel Agreement, Sentinel has the option to sell the remaining 25% to the Company. In consideration of purchase price investment in Sentinel, the Company is entitled to an additional 50.1% of the net profits of Sentinel
On May 19, 2021, the Company announced that its wholly owned subsidiary, DSS PureAir, Inc., a Texas corporation (“DSS PureAir”), closed on a Securities Purchase Agreement with Puradigm LLC, a Nevada limited liability corporation (“Puradigm”). Pursuant to the terms of the Securities Purchase Agreement, DSS PureAir agreed to provide Puradigm a secured convertible promissory note in the maximum principal amount of $5,000,000.00 (the “Puradigm Note”). The Puradigm Note has a two-year term with interest at 6.65% payable quarterly. All, or part of the Puradigm Note principal balance can be converted at the sole discretion of DSS PureAir for up to an 18% membership interest in Puradigm LLC. The Puradigm Note is secured by all the assets of Puradigm under a security agreement with Puradigm.
On June 18, 2021, AMRE Shelton, LLC., (“AMRE Shelton”) a subsidiary of AMRE financed the purchase of a 40,000 square foot, 2.0 story, Class A+ multi-tenant medical office building located on a 13.62-acre site in Shelton, Connecticut (See Note 7). In accordance with Topic 805, the acquisition of the medical acquired has been determined to be an acquisition of assets as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. This property was appraised at approximately $7,150,000, of which $6,027,000 and $815,000 was allocated to the facility and land respectively. Also include in the value of the property is $308,000 of intangible assets with an estimated useful life of 11 years. Contained within the sale-purchase agreement for this facility, is a $1,500,000 earnout due to the seller if certain criteria are met. As of September 30, 2021, no liability has been recorded for this earnout as management determined it is currently remote.
On September 9, 2021, the Company finalized a stock purchase agreement (the “SPA”) with American Pacific Bancorp (“APB”), which provided for an investment of $40,000,200 by the Company into APB for an aggregate of 6,666,700 shares of the APB’s Class A Common Stock, par value $0.01 per share. Subject to the terms and conditions contained in the SPA, the shares issued at a purchase price of $6.00 per share. As a result of this transaction, DSS became the majority owner of APB. APB is organized for the purposes of being a financial network holding company, focused providing commercial loans and on acquiring equity positions in (i) undervalued commercial bank(s), bank holding companies and nonbanking licensed financial companies operating in the United States, South East Asia, Taiwan, Japan and South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, problem asset management, SPAC (special purpose acquisition company) consulting, and advisory capital raising services. From this financial platform, the Company shall provide an integrated suite of financial services for businesses that shall include commercial business lines of credit, land development financing, inventory financing, third party loan servicing, and services that address the financial needs of the world Gig Economy.
On September 13, 2021, the Company finalized a shareholder agreement and joint venture between its subsidiary, DSS Financial Management, Inc. (“DFMI”) and HR1 Holdings Limited (“HR1”), a company incorporated in the British Virgin Islands, for the purpose to operate a vehicle for private and institutional investors seeking a highly liquid investment fund with attractive risk adjusted returns relative to market unpredictability and volatility. Under the terms of this agreement, 4000 shares or 40% of the Company’s subsidiary Liquid Asset Limited Management Limited (“LVAM”), a Hong Kong company was transferred to HR1 whereas at the conclusion of the transaction DFMI would own 60% of LVAM and HR1 would own 40%. LVAM executes within reliable platforms and broad market access and uses proprietary systems and algorithms to trade liquid exchange-traded funds (ETFs), stocks, futures or crypto. Aimed at providing consistent returns while offering the unique ability to liquidate the portfolio within 5 to 10 minutes under normal market conditions, LVAM provides an array of advanced tools and products enabling customers to explore multiple opportunities, strengthen and diversify their portfolios, and meet their individual investing goals.
On April 7th, 2021, the Company entered into a transfer and assignment agreement (“RIA Agreement”) between DSS Securities, Inc. (“DSSS”) and AmericaFirst Capital Management, LLC (“Advisor”), a California limited liability company and the registered investment advisor (“RIA”) to all the funds within the AmericaFirst Quantitative Funds Trust (“Trust”). In September of 2021, with the approval of the Trust’s Board of Trustees and its shareholders, and with the consideration of $600,000 paid, DSSS became the new registered investment advisor to the Trust. Upon the completion of the transfer, the Trust was renamed to the DSS AmericaFirst Quantitative Trust. The DSS AmericaFirst Quantitative Trust is a Delaware business trust established in 2012. The Trust currently consists of 4 mutual funds managed by DSS Wealth Management, Inc.: The DSS AmericaFirst Income Trends Fund, DSS AmericaFirst Defensive Growth Fund, DSS AmericaFirst Risk-On Risk-Off Fund, and DSS AmericaFirst Large Cap Buyback Fund. The funds seek to outperform their respective benchmark indices by applying a quantitative rules-based approach to security selection. The DSS AmericaFirst Quantitative Funds is a suite of mutual funds managed by DSS Wealth Management, Inc. that will expand into numerous investment platforms including additional mutual funds, exchange-traded funds, unit investment trusts and closed-end funds. We see substantial growth opportunities in each of these platforms as we are committed to building and expanding upon an experienced distribution infrastructure. For DSSS services rendered in its role as RIA, the Trust shall pay a fee for each fund calculated as a percentage of the average daily net assets. The $600,000 consideration given is recorded as an Other intangible asset, net on the Consolidated Balance Sheet at September 30, 2021. As the RIA Agreement has no defined period, this asset has been deemed an infinite life asset and no amortization has been taken.
The five reporting segments are as follows:
DSS Packaging and Printing GroupPremier Packaging: - Operating under(“Premier”) The Company’s consumer packaging and security printing group is coordinated by the namewholly owned subsidiary, Premier Packaging Corporation, (aa New York corporation), the DSS Packaging and Printing Group produces custom packaging serving clientscorporation. Premier operates in the pharmaceutical, nutraceutical, beverage, specialty foods, photo packaging and direct marketing industries, among others. The group also provides active and intelligentpaper board folding carton, smart packaging, and document security printing services for end-user customers along with technical support for our technology licensees. The division produces a wide array of printed materials, such asmarkets. It markets, manufactures, and sells mailers, photo sleeves, sophisticated custom folding cartons, and paperboard packaging, security paper, vital records, prescription paper, birth certificates, secure couponscomplex 3-dimensional direct mail solutions. These products are designed to provide functionality and parts tracking forms.marketability while also providing counterfeit protection. Premier is currently located in Victor, NY and serves the US market.
Investment Bank: (“Investment Bank”) This segment is organized for the purposes of being a financial network holding company, focused providing commercial loans and on acquiring equity positions in (i) undervalued commercial bank(s), bank holding companies and nonbanking licensed financial companies operating in the United States, South East Asia, Taiwan, Japan and South Korea, and (ii) companies engaged in—nonbanking activities closely related to banking, including loan syndication services, mortgage banking, trust and escrow services, banking technology, loan servicing, equipment leasing, problem asset management, SPAC (special purpose acquisition company) consulting, and advisory capital raising services. From this financial platform, the Company shall provide an integrated suite of financial services for businesses that shall include commercial business lines of credit, land development financing, inventory financing, third party loan servicing, and services that address the financial needs of the world Gig Economy.
BioHealth Group: (“BioHealth”) The division also provides resourcesBioHealth Group is our business line created to invest in, or acquire companies in the biohealth and production equipment for our ongoing researchbiomedical fields, including businesses focused on the advancement of drug discovery and developmentprevention, inhibition, and treatment of security printing, authenticationneurological, oncological, and immune related technologies.
DSS Digital Group -diseases. This division researches, develops, marketsis also developing open-air defense initiatives, which curb transmission of air-borne infectious diseases, such as tuberculosis and sells worldwideinfluenza. The BioHealth Group is also targeting unmet, urgent medical needs. Assets of this group are organized under the Company’s digital products, including and primarily our AuthentiGuard® product, which isholding company, DSS BioHealth Security, Inc. Its subsidiaries are currently headquartered in Rochester, NY. The group also has a brand authentication application that integrates the Company’s counterfeit deterrent technologies with proprietary digital data security-based solutions. The AuthentiGuard® product allows our customers to implement a security mark utilizing conventional printing methods that is copy and counterfeit-resistant and that can be read and recorded utilizing smartphones and other digital image capture devices, which can be utilized by that customer’s suppliers, field personnel and end users throughout its global product supply and distribution chains.research facility in Winter Haven, Florida.
DSS Technology Management - Since its acquisition in 2013, DSS Technology Management’s primary mission has been to monetize its various patent portfolios through commercial litigation and licensing. Except for investment in its social networking related patents, we have historically partnered with various third-party funding groups in connection with patent monetization programs. It is our intent to de-emphasize and ultimately wind down this business line. While Management will continue to assert and defend the existing patents and purse potential infringements as they are identified, we do not intend to seek out new patent portfolios.
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Securities and Fintech Group: (“Securities”) Securities was established to develop and/or acquire assets and investments in the securities trading and/or funds management arena. Further, Securities, in partnership with recognized global leaders in alternative trading systems, intends to own and operate in the US a single or multiple vertical digital asset exchanges for securities, tokenized assets, utility tokens, stable coins and cryptocurrency via a digital asset trading platform using blockchain technology. The scope of services within this section is planned to include asset issuance and allocation (securities and cryptocurrency), FPO, IPO, ITO, PPO, STO and UTO listings on a primary market(s), asset digitization/tokenization (securities, currency and cryptocurrency), and the listing and trading of digital assets (securities and cryptocurrency) on a secondary market(s). Also in this segment is the Company’s real estate investment trust (“REIT”), organized for the purposes of acquiring hospitals and other acute or post-acute care centers from leading clinical operators with dominant market share in secondary and tertiary markets, and leasing each property to a single operator under a triple-net lease. the REIT was formed to originate, acquire, and lease a credit-centric portfolio of licensed medical real estate. This group is headquartered in Huston, Texas.
Direct MarketingMarketing/Online Sales Group: -(“Direct” or “DM”) Led by the holding corporation, Decentralize Sharing Systems, Inc. (“Decentralized”, this group provides services to assist companies in the emerging growth gig business model of peer-to-peer direct marketing. Direct specializes in marketing and distributing its products and services through its subsidiaries, partner networks, and online marketplaces. Direct marketing or networkproducts include, among other things, nutritional and personal care products sold throughout North America, Asia Pacific and Eastern Europe. Over the past 18 months, Direct has made substantial investments in acquiring marketing is designed to sell products or services directly to the public throughsoftware, product opportunities, and operational capabilities in this marketplace. Additionally, it has acquired and developed an independent distributors, rather than selling through the traditional retail market. We believe this businesscontractor sales force. It has significant growth potential in the now popular “gig economy”. Consistent with the Company’s strategic business plan and vision, we plan to enter the direct marketing or network marketing industry and take advantage of the opportunities that exist. We have enteredalso made substantial investments into partnerships with existingother direct marketing companies, including its investment and partnership with Sharing Services Global Corporation (OTCQB: SHRG) (“Sharing Services” or “SHRG”), which as of September 30, 2021, Decentralized owned approximately 47% of the outstanding shares of Sharing Services. Currently, Direct and SHRG operate offices in USA, Canada, Hong Kong, Singapore, S. Korea, Australia, New Zealand, Malaysia, and Singapore, with additional offices or presence being added monthly. Decentralized sharing systems’ mission is to access U.S., Canadian, Asianbecome the leading direct sales platform, training, developing and Pacific Rim markets. In addition, we have acquired various domesticempowering leaders on a global scale to achieve maximum human and international operating licenses from those companies. Through the acquisitions we have secured product licenses, formulas, existing sales networks, patents, web sites, and other resources to initiate sales and revenue generation for this line and launched our HWHGIG and HWH Marketplace direct selling platforms.economic potential.
Results of Operationsoperations for the Threethree- and Nine Months Endednine-months ended September 30, 20202021, as compared to the Threethree- and Nine Months Endednine-months ended September 30, 20192020.
This discussion should be read in conjunction with the financial statements and footnotes contained in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Revenue
Three months ended September 30, 2020 | Three months ended September 30, 2019 | % Change | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | % Change | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Printed products | $ | 2,971,000 | $ | 2,119,000 | 40 | % | $ | 8,405,000 | $ | 8,433,000 | 0 | % | ||||||||||||
| Technology sales, services and licensing | 483,000 | 498,000 | -3 | % | 1,319,000 | 1,424,000 | -7 | % | ||||||||||||||||
| Direct marketing | 715,000 | - | n/a | 1,793,000 | - | n/a | ||||||||||||||||||
| Total Revenue | $ | 4,169,000 | $ | 2,617,000 | 59 | % | $ | 11,517,000 | $ | 9,857,000 | 17 | % | ||||||||||||
Three months ended September 30, 2021 | Three months ended September 30, 2020 | % Change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % Change | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Printed products | $ | 3,416,000 | $ | 2,971,000 | 15 | % | $ | 10,652,000 | $ | 8,409,000 | 27 | % | ||||||||||||
| Rental income | 184,000 | - | N/A | 184,000 | - | N/A | ||||||||||||||||||
| Direct marketing | 966,000 | 715,000 | 35 | % | 2,382,000 | 1,793,000 | 33 | % | ||||||||||||||||
| Total Revenue | $ | 4,566,000 | $ | 3,686,000 | 24 | % | $ | 13,218,000 | $ | 10,202,000 | 30 | % | ||||||||||||
For the three monthsthree- and nine-months ended September 30, 2020,2021, total revenue increased 59%24% and 30% respectively, as compared to the three monthsthree- and nine-months ended September 30, 2019.2020. Revenues from the sale of Printed products increased 40%15%, and 27% during the three monthsthree- and nine-months ended September 30, 2020,2021, respectively, as compared to the same period in 2019,2020, primarily due to an increase in packaging sales due to customer sales returning after reopening from COVID-19 and the addition of new customers. Technology sales, servicescustomers and licensing revenue decreased 3% during the three months ended September 30, 2020 as comparedexisting customers return to the same period in 2019. For the nine months ended September 30, 2020, total revenue increased 17% due to the revenue associated with our Direct Marketing line of business.pre-Covid 19 operations. Direct marketing revenue increase illustrates the Company’s entrancecontinued expansion into the direct marketing industry and its associated opportunities. Rental income is derived from the Company’s Investment in real estate, net.
Costs and expenses
Three months ended September 30, 2020 | Three months ended September 30, 2019 | % Change | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | % Change | Three months ended September 30, 2021 | Three months ended September 30, 2020 | % Change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % Change | |||||||||||||||||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
| Costs of goods sold, exclusive of depreciation and amortization | $ | 2,637,000 | $ | 1,786,000 | 48 | % | $ | 7,077,000 | $ | 6,702,000 | 6 | % | ||||||||||||||||||||||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | $ | 3,184,000 | $ | 2,566,000 | 24 | % | $ | 9,513,000 | $ | 6,869,000 | 38 | % | ||||||||||||||||||||||||||||||||||||
| Sales, general and administrative compensation | 1,075,000 | 563,000 | 91 | % | 2,928,000 | 1,897,000 | 54 | % | 3,250,000 | 679,000 | 379 | % | 9,577,000 | 1,737,000 | 451 | % | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 246,000 | 298,000 | -17 | % | 824,000 | 844,000 | -2 | % | 739,000 | 244,000 | 203 | % | 2,075,000 | 812,000 | 156 | % | ||||||||||||||||||||||||||||||||
| Professional fees | 943,000 | 543,000 | 74 | % | 2,217,000 | 1,265,000 | 75 | % | 1,235,000 | 931,000 | 33 | % | 3,444,000 | 2,203,000 | 56 | % | ||||||||||||||||||||||||||||||||
| Stock based compensation | 133,000 | 273,000 | -51 | % | 216,000 | 331,000 | -35 | % | 13,000 | 128,000 | -90 | % | 42,000 | 181,000 | -77 | % | ||||||||||||||||||||||||||||||||
| Sales and marketing | 1,015,000 | 103,000 | 885 | % | 1,769,000 | 363,000 | 387 | % | 1,060,000 | 1,213,000 | -13 | % | 2,586,000 | 2,210,000 | 17 | % | ||||||||||||||||||||||||||||||||
| Rent and utilities | 74,000 | 96,000 | -23 | % | 283,000 | 286,000 | -1 | % | 42,000 | 60,000 | -30 | % | 175,000 | 237,000 | -26 | % | ||||||||||||||||||||||||||||||||
| Research and development | 26,000 | (32,000 | ) | 181 | % | 26,000 | (13,000 | ) | 300 | % | 190,000 | 37,000 | 414 | % | 645,000 | 37,000 | 1,643 | % | ||||||||||||||||||||||||||||||
| Other operating expenses | 409,000 | 167,000 | 145 | % | 723,000 | 473,000 | 53 | % | 398,000 | 401,000 | -1 | % | 1,152,000 | 722,000 | 60 | % | ||||||||||||||||||||||||||||||||
| Total costs and expenses | $ | 6,558,000 | $ | 3,797,000 | 73 | % | $ | 16,063,000 | $ | 12,148,000 | 32 | % | $ | 10,111,000 | $ | 6,259,000 | 62 | % | $ | 29,209,000 | $ | 15,008,000 | 95 | % | ||||||||||||||||||||||||
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Costs of goods sold,revenue, exclusive of depreciation and amortization includes all direct costs of direct marketing and printed products revenues, including materials, direct labor, transportation and manufacturing facility costs. In addition, this category includes all direct costs associated with technology sales, services and licensing including hardware and software that are resold, and fees paid to inventors or others as a result of technology licenses or settlements, if any. Costs of goods sold increased 48%24% and 6% respectively during38% for the threethree- and nine monthsnine-months ended September 30, 20202021, respectively as compared to the same periods in 2019.2020. This increase is driven primarily by an increase in materialmanufacturing costs relatedassociated with the products sold as part of our Direct Marketing, division.and Packaging and Printing segments, in particular, increases in freight, paper, and overhead costs.
Sales, general and administrative compensation costs, excluding stock-based compensation, increased 91%379% and 54% respectively451% during the threethree- and nine monthsnine-months ended September 30, 2020,2021, respectively, as compared to the same periods in 2019,2020, primarily due to changes in headcount year over year associated with expanding our sales team as well as the addition of our Direct Marketing and BioHealth business segment,segments, and an increase in cost of the Company’s health and welfare programs.performance bonus accruals approximating $6.2 million.
Depreciation and amortization include the depreciation of machinery and equipment used for production, depreciation of office equipment and building and leasehold improvements, amortization of software, and amortization of acquired intangible assets such as customer lists, trademarks, non-compete agreements and patents, and internally developed patent assets. For the threethree- and nine monthsnine-months ended September 30, 2020,2021, depreciation and amortization expense decreased 17%increased 203% and decreased 2%156% respectively as compared to the same periods in 20192020 due primarily to sale and disposal of assets of the DSS Plastics Group.amortization on newly acquired intangibles assets.
Professional fees increased 74%33% and 75%56% respectively during the threethree- and nine monthsnine-months ended September 30, 2020,2021, as compared to the same periods in 2019,2020, mostly due to increases in legal services for the outsourcing of corporate legal services, legal fees associated with the defense of a suit brought by Intel Corporation and Apple, Inc. against the Company (see Note 8), costs for discontinued operations and consulting fees incurred byrelated to the Direct Marketing business segment, and acquisition activities.yearly audit fees.
Stock based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. Stock based compensation decreased 51%90% and 35%77% respectively during the threethree- and nine monthsnine-months ended September 30, 20202021, as compared to the same periods in 2019. This was2020, driven by a larger numberthe expiration of shares issued in 2019options awarded to managers, directors and consultants.employees no longer with the Company.
Sales and marketing which include internet and trade publication advertising, travel and entertainment costs, sales-broker commissions, and trade show participation expenses increased 885%expenses. The decreased of 13% and 387%increase of 17% respectively during the threethree- and ninenine- months ended September 30, 20202021, as compared to the same periods in 2019, resulting from an increase in2020, is a result of the commissions paid to brokers associated with the Company’s Direct Marketing segment.
Rent and utilitiesdecreased by 23%30% and 1%of 26% respectively during the threethree- and nine monthsnine-months ended September 30, 2020,2021, as compared to the same periodsperiod in 2019,2020, primarily due to a decrease in facilities maintenance costs and utilities for the Company’s discontinued operations.Company. This was offset by a new facility lease in Houston, Texas started during the first quarter of 2021.
Research and development increased 181% and 300% respectively costs increases during the threethree- and nine monthsnine-months ended September 30, 20202021, as compared to the same periods in 2019 due to refunds of grant money and rebates in 2019 that did not recurperiod in 2020 andare due to the acquisition of Impact Biomedical, Inc. in 2020.2020 and the related costs for continued research and development of the acquired product formulations as well as development of new technologies.
Other operating expenses consist primarily of equipment maintenance and repairs, office supplies, IT support, and insurance costs. During the threethree- and nine monthsnine-months ended September 30, 2020,2021, other operating expenses increased 145%decreased 1% and increased 53%60% respectively as compared to the same periodsperiod in 20192020 due to startupincreased software costs forassociated with enhancements to the Company’s ERP system as well as new software implement as part of the Company’s Direct Marketing segment.segment and increased D&O insurance.
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Other Income (Expense)
Three months ended September 30, 2020 | Three months ended September 30, 2019 | % Change | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | % Change | |||||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Interest Income | $ | 10,000 | $ | 7,000 | 43 | % | $ | 61,000 | $ | 11,000 | 455 | % | ||||||||||||
| Interest Expense | (29,000 | ) | (49,000 | ) | -41 | % | (101,000 | ) | (104,000 | ) | -3 | % | ||||||||||||
| Unrealized gain on marketable securities | 7,782,000 | - | N/A | 8,365,000 | - | N/A | ||||||||||||||||||
| Amortization of deferred financing costs and debt discount | (8,000 | ) | - | N/A | (8,000 | ) | (2,000 | ) | 300 | % | ||||||||||||||
| Total costs and expenses | $ | 7,755,000 | $ | (42,000 | ) | 18564 | % | $ | 8,317,000 | $ | (95,000 | ) | 8855 | % | ||||||||||
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | % Change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % Change | |||||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Interest Income | $ | 1,593,000 | $ | 10,000 | 15,830 | % | $ | 3,130,000 | $ | 61,000 | 5,031 | % | ||||||||||||
| Other Income | 325,000 | - | N/A | 575,000 | - | N/A | ||||||||||||||||||
| Interest Expense | (31,000 | ) | (29,000 | ) | 7 | % | (157,000 | ) | (102,000 | ) | 54 | % | ||||||||||||
| Loss on equity method investment | (1,645,000 | ) | - | N/A | (2,556,000 | ) | - | N/A | ||||||||||||||||
| (Loss) gain on investments | (2,996,000 | ) | 7,782,000 | -138 | % | (10,894,000 | ) | 8,366,000 | -230 | % | ||||||||||||||
| Gain/(Loss) on extinguishment of debt | - | - | N/A | 116,000 | - | N/A | ||||||||||||||||||
| Amortization of deferred financing costs and debt discount | - | (8,000 | ) | -100 | % | - | (8,000 | ) | -100 | % | ||||||||||||||
| Total other income | $ | (2,754,000 | ) | $ | 7,755,000 | 136 | % | $ | (9,786,000 | ) | $ | 8,317,000 | 218 | % | ||||||||||
Interest income is recognized on the Company’s money markets, as well asnotes receivable, and the accretion of the discount on convertible notes receivable identified in Note 3.
Other income represents recognition of amortization of note origination fees.
Interest expense decreased 41% increased 7% and 3% respectively54% during the threethree- and nine monthsnine-months ended September 30, 2020,2021, respectively, as compared to the same periodsperiod in 2019,2020, due to increasing debt balances.
Unrealized loss on equity investment Loss from equity method investment is driven by the payoffCompany’s prorated portion of DSS Plastic debt duringSharing Services Global Corp’s earnings for the quarter (see Note 6).three- and nine-months ended September 30, 2021.
Unrealized gain (Loss) gain on investments consists of realized losses on marketable securities is which are recognized as the difference between the purchase price and sale price of the common stock investment. For the three- and nine-months ended September 30, 2021, $0 and $519,000 respectively, realized loss was recorded. Also unrealized losses on marketable securities which are recognized on the change in fair market value on our common stock investment is Sharing Services Global Corp. approximately $6.1 million anddriven by unrealized losses on Alset International Limited of approximately $2.1 million$839,000 for the nine monthsnine-months ended September 30, 2020.2021. Also included are the loss of approximately $9,477,000 on warrants which are recognized as the change in option value of warrants held at September 30, 2021 (See Note 6).
Gain on extinguishment of debt in April 2020, AAMI received funds from the SBA Paycheck Protection Program of $116,000. As of January 8, 2021, this note was forgiven in full.
Net Loss
Three months ended September 30, 2021 | Three months ended September 30, 2020 | % Change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % Change | |||||||||||||||||||
| (Loss) income from continuing operations | $ | (6,675,000 | ) | $ | 5,182,000 | 229 | % | $ | (21,462,000 | ) | $ | 3,511,000 | 711 | % | ||||||||||
| Income (loss) from discontinued operations, net of tax | - | (240,000 | ) | 100 | % | 2,129,000 | (1,442,000 | ) | 248 | % | ||||||||||||||
| Net (loss) income | $ | (6,675,000 | ) | $ | 4,942,000 | 235 | % | $ | (19,333,000 | ) | $ | 2,069,000 | 1,034 | % | ||||||||||
Net Income (Loss)
Three months ended September 30, 2020 | Three months ended September 30, 2019 | % Change | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | % Change | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 5,366,000 | $ | (1,222,000 | ) | 539 | % | $ | 3,771,000 | $ | (2,386,000 | ) | 258 | % | ||||||||||
| Loss from discontinued operations | (424,000 | ) | (29,000 | ) | -1362 | % | (1,702,000 | ) | (346,000 | ) | -392 | % | ||||||||||||
| Net Income (loss) | $ | 4,942,000 | $ | (1,251,000 | ) | 495 | % | $ | 2,069,000 | $ | (2,732,000 | ) | 176 | % | ||||||||||
For the threethree- and nine monthsnine-months ended September 30, 2020,2021, the Company recorded net incomeloss from continuing operations of $5,366,000$6,675,000 and $3,771,000,$21,462,000 respectively, as compared to a net lossgain of $1,222,000$5,182,000 and $2,386,000, respectively$3,511,000 during the same periods in 2019.2020. The increase in net incomeloss during the threethree- and nine monthsnine-months ended September 30, 20202021, as compared to the same periods in 20192020 primarily reflect the company’s unrealized gainslosses on its marketable securities, of $7,782,000 and $8,365,000, respectively. Forwarrants, increased costs associated with new business lines, as well as increases in performance-based compensation. The loss from continuing operations for the threethree- and nine monthsnine-months ended September 30, 2020,2021, is inclusive of a $1,624,000 and $4,315,000 respectively, income tax benefit. Our effective tax rate for the Company recorded net loss from discontinued operations of $424,000 and $1,702,000 respectively, as compared to a net loss of $29,000 and $346,000, respectively during the samenine-month periods in 2019. The change in net losses incurred during the three and nine months ended September 30, 2021, is 17.3%. There was no tax provision for September 30, 2020, as compareddue to the same periods in 2019 primarily reflect the combined impact of a decline in revenuesexpected tax benefit from net operating losses (NOLs) being fully offset by an increase in the Plastics Products Group driven by the impact of the Covid-19 pandemic as well as the Q1 2020 impairment of goodwill totaling $685,000.valuation allowance.
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LIQUIDITY AND CAPITAL RESOURCES
Continuing Operations and Going Concern– The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. While the Company has approximately $11.6 million in cash,historically met its liquidity and a positive working capital positionrequirements primarily through the sale of approximately $13.3 million asits equity securities and debt financings. As of September 30, 2020,2021, the Company has incurred operating losses as well as negativehad cash flows from operating and investing activities over the past two years.
To continue as a going concern, during the nine months endedof approximately $69.1 million. As of September 30, 2020,2021, the Company through multiple underwriting agreements with Aegis Capital Corp., acting as representativebelieves that it has sufficient cash to meet its cash requirements for at least the next 12 months from the filing date of the several underwriters, provided the issuance and sale by the Company in an underwritten public offering (the “Offering”) shares of the Company’s common stock. The net offering proceeds to the Company approximated $20.1 million.
The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters includes, among other things, continued growth among our operating segments, and tightly controlling operating costs and reducing spending growth rates wherever possible to return to profitability.this Annual Report. In addition, the Company has taken steps, andbelieves that it will continuehave access to take measures, to materially reducesources of capital from the expenses and cash burn at all corporate and business line levels. During the nine months ended September 30, 2020, material steps were taken to materially reduce or eliminate cash burns in the IP Monetization program, the DSS Digital Group and the DSS Plastics group.
At the Company’s current operating levels and capital usage, we believe that without any further acquisition or investments, our $11.6 million in aggregate cash as of September 30, 2020, would allow us to fund our eight business lines current and planned operations through October 2021. Based on this, the Company has concluded that substantial doubtsale of its ability to continue as a going concern has been alleviated.equity securities and debt financings.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The financial statements as of December 31, 20192020, describe the significant accounting policies and methods used in the preparation of the financial statements. There have been no material changes to such critical accounting policies as of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.2021.
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer who is also our principal financial officer, we conducted an evaluation of our disclosure controls and procedures for the quarter ended September 30, 2020,2021, pursuant to Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation and on the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 20192020 which remained as of September 30, 2020,2021, our principal executive officer and principal financial officer concluded that as of September 30, 2020,2021, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is being recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is being accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Plan for Remediation of Material Weaknesses
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, the Company has a remediation plan and is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in our controls. The Company has started to implement these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weaknesses described above will continue to exist.
Changes in Internal Control over Financial Reporting
While changes in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 20202021, as the Company began implementation of the remediation steps described above, we believe that there were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020,2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
See commentary in Note 89 Commitments and Contingencies.
The Company is a smaller reporting company, as such term is definedThere have been no material changes to the discussion of risk factors previously disclosed in Item 10(f)(1) of Regulation S-K, and is therefore not required to provideour most recently filed Annual Report on Form 10-K for the information required under this item.year ended December 31, 2020.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 16, 2020 the CompanySeptember 3, 2021, we issued 662,500 shares of the Company’s common stock upon the conversion of 4,293 shares of Series A Preferred Stock. Shares of Series A Preferred Stock have a value of $1,000 per share and may be converted into shares of the Company’s common stock at a conversion price of $6.48 per share, subject to a 19.9% beneficial ownership conversion limitation based on the total issued and outstanding12,155,591 shares of common stock, $0.02 par value, at a price of $1.234 per share for aggregate proceeds of up to $15,000,000. The sale of shares of our common stock was made pursuant to a subscription agreement entered into by us, on the one hand, and Alset EHome International, Inc., on the other hand. The issuance and sale of the Company beneficially owned by the holder. There is no cash or other consideration paid by the holder converting the shares and, accordingly, there is no cash or other consideration received by the Company.
The issuance of the above securities was deemed to beour common stock are exempt from the registration requirements of the Securities Act, of 1933, as amended, by virtue of sectionpursuant to Section 4(a)(2) thereof and Regulation D or Regulation S thereunder, as a transaction by an issuer not involving a public offering.applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
None.
ITEM 6 - EXHIBITS
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
*Filed herewith.
| 35 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DOCUMENT SECURITY SYSTEMS, INC. | |||
| By: | /s/ Frank D. Heuszel | ||
| Frank D. Heuszel | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| November 18, 2021 | By: | /s/ Todd D. Macko | |
| Todd D. Macko | |||
| Chief Financial Officer | |||
| 36 |